PositiveID
POSITIVEID Corp (Form: 10-K, Received: 03/30/2015 17:09:37)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

(Mark One)

 

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

 

For the fiscal year ended December 31, 2014

 

or

 

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

 

For the transition period from                       to

 

Commission file number: 001-33297

 

POSITIVEID CORPORATION

(Exact name of registrant as specified in its charter)

 

DELAWARE   06-1637809
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

1690 South Congress Avenue, Suite 201

Delray Beach, Florida 33445

(Address of principal executive offices) (Zip code)

 

(561) 805-8000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, par value $0.01 per share   None
(Title of each class)   (Name of each exchange on which registered)

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  þ No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
        (Do not check if smaller reporting company)    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant computed by reference to the price at which the common stock was last sold on the OTC Bulletin Board on June 30, 2014 was $4,895,734. For purposes of this calculation, shares of common stock held by each officer and director and by each person who owns 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

At March 19, 2015, 221,441,067 shares of our common stock were outstanding.

 

 
 

 

Table of Contents

 

Item   Description Page
       
Special Note Regarding Forward-Looking Statements 1
    Part I  
1.   Business 3
       
1A.   Risk Factors 11
       
1B.   Unresolved Staff Comments 16
       
2.   Properties 16
       
3.   Legal Proceedings 16
       
4.   Mine Safety Disclosures 16
       
    Part II  
       
5.   Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities 17
       
6.   Selected Financial Data 20
       
7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
       
7A.   Quantitative and Qualitative Disclosures About Market Risk 24
       
8.   Financial Statements and Supplementary Data 24
       
9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 24
       
9A.   Controls and Procedures 25
       
9B.   Other Information 25
       
    Part III  
       
10.   Directors, Executive Officers and Corporate Governance 26
       
11.   Executive Compensation 27
       
12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 31
       
13.   Certain Relationships and Related Transactions, and Director Independence 33
       
14.   Principal Accountant Fees and Services 36
       
    Part IV
       
15.   Exhibits, Financial Statement Schedules 38
       
    Signatures 39
       
    Index to Consolidated Financial Statements F-1
 
 

   

Special Note Regarding Forward-Looking Statements

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

  that our M-BAND product is well positioned to compete for the next generation BioWatch system;

 

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

 

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

 

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

 

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

  

  that the medical application of our Firefly Dx product will require FDA clearance or CLIA waiver;

  

 

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

 

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

 

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

   

This Annual Report also contains forward-looking statements attributed to third parties relating to their estimates regarding the size of the future market for products and systems such as our products and systems, and the assumptions underlying such estimates.  Forward-looking statements include all statements that are not historical facts and can be identified by forward-looking statements such as “may,” “might,” “should,” “could,” “will,” “intends,” “estimates,” “predicts,” “projects,” “potential,” “continue,” “believes,” “anticipates,” “plans,” “expects” and similar expressions. Forward-looking statements are only predictions based on our current expectations and projections, or those of third parties, about future events and involve risks and uncertainties.

 

1
 

 

Although we believe that the expectations reflected in the forward-looking statements contained in this Annual Report are based upon reasonable assumptions, no assurance can be given that such expectations will be attained or that any deviations will not be material. In light of these risks, uncertainties and assumptions, the forward-looking statements, events and circumstances discussed in this Annual Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Important factors that could cause our actual results, level of performance or achievements to differ materially from those expressed or forecasted in, or implied by, the forward-looking statements we make in this Annual Report are discussed under “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report and include:

 

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

 

  our ability to continue as a going concern;

 

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

 

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

 

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

 

  our ability to target the bio-threat detection and real-time PCR markets;
     
  our ability to obtain and maximize the amount of capital that we will have available to pursue business opportunities;

 

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

 

  the potential for costly product liability claims and claims that our products infringe the intellectual property rights of others;

 

  our ability to comply with current and future regulations relating to our businesses;

 

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

 

  the potential for an unfavorable outcome relating to the Canadian tax audit;

 

  our ability to be awarded government contracts;

 

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

 

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

 

  our ability to successfully identify strategic partners or acquirers for the breath glucose detection system;
     
  our ability to receive royalties under the Asset Purchase Agreement with VeriTeQ;
     
  our ability to recover or monetize the convertible notes receivable and warrant with VeriTeQ;

  

You should not place undue reliance on any forward-looking statements. In addition, past financial or operating performance is not necessarily a reliable indicator of future performance, and you should not use our historical performance to anticipate future results or future period trends. Except as otherwise required by federal securities laws, we disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained in this Annual Report to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based. All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements included in this Annual Report.

 

2
 

  

PART I

Item 1. Business

 

The Company

 

PositiveID Corporation, including its wholly-owned subsidiary Microfluidic Systems (“MFS”) (collectively, the “Company” or “PositiveID”), develops molecular diagnostic systems for bio-threat detection and rapid medical testing. The Company’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 also developing Firefly Dx, an automated pathogen detection system for rapid diagnostics, both for clinical and point-of-need applications.

 

PositiveID, formerly known as VeriChip Corporation, was formed as a Delaware corporation by Digital Angel Corporation, or Digital Angel, in November 2001. In January 2002, we began our efforts to create a market for radio frequency identification, or RFID, systems that utilize our human implantable microchip. During the first half of 2005 we acquired two businesses focused on providing RFID systems for healthcare applications. Those businesses (EXi Wireless and Instantel) were merged in 2007 to form Xmark Corporation, or Xmark, which was a wholly-owned subsidiary of ours.

 

On July 18, 2008, we completed the sale of all of the outstanding capital stock of Xmark, which at the time was principally all of our operations, to Stanley Canada Corporation, or Stanley, a wholly-owned subsidiary of Stanley Black and Decker. The sale transaction was closed for $47.9 million in cash, which consisted of the $45 million purchase price plus a balance sheet adjustment of approximately $2.9 million, which was adjusted to $2.8 million at settlement of the escrow. Under the terms of the stock purchase agreement, $43.4 million of the proceeds were paid at closing and $4.4 million was released from escrow in July 2009. As a result, we recorded a gain on the sale of Xmark of $6.2 million, with $4.5 million of that gain deferred until 2009 when the escrow was settled.

 

Following the completion of the sale of Xmark to Stanley, we retired all of our outstanding debt for a combined payment of $13.5 million, and settled all contractual payments to Xmark’s and our officers and management for $9.1 million. On August 28, 2008, we paid a special dividend to our stockholders of $15.8 million.

 

On November 12, 2008, we entered into an Asset Purchase Agreement, (“APA”), with Digital Angel Corporation and Destron Fearing Corporation, a wholly-owned subsidiary of Digital Angel Corporation, which collectively are referred to as “Digital Angel.” The terms of the APA included our purchase of patents related to an embedded bio-sensor system for use in humans, and the assignment of any rights of Digital Angel under a development agreement associated with the development of an implantable glucose-sensing microchip. We also received covenants from Digital Angel Corporation and Destron Fearing that permit the use of intellectual property of Digital Angel related to our health care business without payment of ongoing royalties, as well as inventory and a limited period of technology support by Digital Angel. We paid Digital Angel $500,000 at the closing of the APA.

 

On September 4, 2009, we, VeriChip Acquisition Corp. (the “Acquisition Subsidiary”), a Delaware corporation and our wholly-owned subsidiary, and Steel Vault Corporation (“Steel Vault”), a Delaware corporation, signed an Agreement and Plan of Reorganization, or the Merger Agreement, dated September 4, 2009, as amended, pursuant to which the Acquisition Subsidiary was merged with and into Steel Vault on November 10, 2009, with Steel Vault surviving and becoming our wholly-owned subsidiary, (the “Merger”). Upon consummation of the Merger, each outstanding share of Steel Vault’s common stock, warrants and options was converted into 12.5 shares of our common stock, warrants and options. At the closing of the Merger, we changed our name to PositiveID Corporation.

 

On February 11, 2010, we entered into an asset purchase agreement, (the “EC-APA”), with Easy Check Medical Diagnostics, LLC, or ECMD, whereby we acquired the assets of ECMD, which included the breath glucose detection system and the iglucose wireless communication system. These products were in the development stage. In exchange for the assets, we issued 12,000 shares of our common stock valued at approximately $351,000. Additional payment in the form of shares (maximum 8,000 shares) and product royalties may be paid in the future based on successful patent grants and product or license revenues. On February 24, 2011, we issued 8,000 shares of our common stock to ECMD to amend the EC-APA.

 

On May 23, 2011, we entered into a Stock Purchase Agreement to acquire MFS, pursuant to which MFS became a wholly-owned subsidiary. MFS specialized in the production of automated instruments for a wide range of applications in the detection and processing of biological samples, ranging from rapid medical testing to airborne pathogen detection for homeland security.

 

On April 18, 2013, our stockholders approved a reverse stock split within a range of between 1-for-10 to 1-for-25. On that same date the Board of Directors of the Company (the “Board”) approved a reverse stock split in the ratio of 1-for-25 and we filed a Certificate of Amendment to our Second Amended and Restated Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware to affect the reverse stock split. On April 23, 2013, the reverse stock split became effective. All share amounts in this Annual Report have been adjusted to reflect the 1-for 25 reverse stock split.

 

3
 

 

Beginning with the acquisition of MFS, the Company began a process to focus its operations on diagnostics and detection. Since acquiring MFS, the Company has (i) sold substantially all of the assets of NationalCreditReport.com, which it acquired in connection with the Steel Vault Merger, (ii) sold its VeriChip and HealthLink businesses (both described below), (iii) entered into an exclusive license for its iglucose technology, and (iv) entered into an exclusive license for its GlucoChip technology. The Company will continue to seek a strategic partner or acquirer for its glucose breath detection system. See “Our Business” under Part I of this Form 10-K for more information and 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 from our website at http://www.positiveidcorp.com as soon as reasonably practicable after we electronically file or furnish such material with or to the SEC. The information on our website is not incorporated by reference into this Annual Report or any registration statement that incorporates this Annual Report by reference.

 

Our Business

 

We are focused on the development of microfluidic systems for the automated preparation of and performance of biological assays in order to detect biological threats at high-value locations and analyze samples in a medical environment. The Company specializes in the development and production of automated instruments for detecting and processing biological samples. PositiveID has a substantial portfolio of intellectual property related to sample preparation and rapid medical testing applications. Since its inception, including MFS 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, and are planning to pursue the next generation of DHS’s BioWatch system, which is an autonomous bio-detection program designed to protect the nation against biological threats. The DHS is currently evaluating the timing and status of the next generation procurement and has previously estimated the cost of the system at $3.1 billion over a five-year period.

 

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, or Boeing. The Boeing License Agreement provides Boeing the exclusive license to sell PositiveID’s M-BAND airborne bio-threat detector for the DHS BioWatch next generation opportunity, as well as other opportunities (government or commercial) that may arise in the North American market. As consideration for entry into the Boeing License Agreement, Boeing paid a license fee of $2.5 million to PositiveID in three installments, all of which has been paid. Under the Teaming Agreement, and subject to certain conditions, the Company retained the exclusive rights to serve as the reagent and assay supplier of 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 20 minutes, which, we believe, would enable accurate diagnostics leading to more rapid and effective treatment than what is currently available with existing systems. Firefly is being developed further for a broad range of biological detection situations including various strains of influenza, Ebola, Sever Acute Respiratory Syndrome, Methicillin-resistant Staphylococcus Aureus (“MRSA”), Dengue Fever Virus, Chikungunya, Nipah, radiation-induced cell damage within the human body and other pathogens. The first-generation, benchtop Firefly cartridge has already demonstrated the ability to detect and identify other common pathogens and diseases such as E. coli, MRSA and human papilloma virus. Firefly is designed to be a simple-to-use, point-of-care, real-time PCR device, which is designed for use by 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.

 

4
 

 

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

 

Through the end of 2011, our business also included the VeriMed system, which used an implantable, passive RFID microchip, (the “VeriChip”). On January 11, 2012, we contributed certain assets and liabilities related to the VeriChip business, as well as all of our assets and liabilities relating to our HealthLink business, which was a patient-controlled, online repository to store personal health information, to our wholly-owned subsidiary, PositiveID Animal Health, or Animal Health. We ceased actively marketing the VeriChip business in January 2008 and the HealthLink business in September 2010.

 

On January 11, 2012, VeriTeQ Acquisition Corporation, or VeriTeQ, which is owned and controlled by our former chairman and chief executive officer, purchased all of the outstanding capital stock of Animal Health in exchange for a secured promissory note in the amount of $200,000, (the “Note”), and 4 million shares of common stock of VeriTeQ representing a 10% ownership interest. Our chief executive officer, Mr. Caragol, served on the Board of Directors of VeriTeQ through July 8, 2013. The Note was secured by substantially all of the assets of Animal Health pursuant to a security agreement dated January 11, 2012, or the VeriTeQ Security Agreement.

 

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

 

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

 

On August 28, 2012, the Company entered into an Asset Purchase Agreement with VeriTeQ, (the “VeriTeQ Asset Purchase Agreement”), whereby VeriTeQ purchased all of the intellectual property, including patents and patents pending, related to the Company’s embedded biosensor portfolio of intellectual property. Under the VeriTeQ Asset Purchase Agreement, the Company is to receive royalties in the amount of ten percent (10%) on all gross revenues arising out of or relating to VeriTeQ’s sale of products, whether by license or otherwise, specifically relating to the embedded biosensor intellectual property, to be calculated quarterly with royalty payments due within 30 days of each quarter end. In 2012, there were no minimum royalty requirements. Minimum royalty requirements thereafter, and through the remaining life of any of the patents and patents pending, are as follows: (i) 2013 - $400,000; (ii) 2014- $800,000; and 2015-and thereafter - $1,600,000.

 

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

 

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

 

5
 

  

On July 8, 2013, the Company entered into a Letter Agreement with VeriTeQ, to amend certain terms of several agreements between PositiveID and VeriTeQ. The Letter Agreement amended certain terms of the Shared Services Agreement entered into between PositiveID and VeriTeQ on January 11, 2012, as amended; the Asset Purchase Agreement entered into on August 28, 2012, as amended; and the Secured Promissory Note dated January 11, 2012. The Letter Agreement defines the conditions of termination of the Shared Services Agreement, including payment of the approximate $274,000 owed from VeriTeQ to PositiveID, the elimination of minimum royalties payable to PositiveID under the Asset Purchase Agreement, as well as certain remedies if VeriTeQ fails to meet certain sales levels, and to amend the Note, which has a current balance of $228,000, to include a conversion feature under which the Note may be repaid, at VeriTeQ’s option, in equity in lieu of cash. The agreements entered into on July 8, 2013 were negotiated in conjunction with VeriTeQ Acquisition Corporation’s merger transaction with Digital Angel Corporation, resulting in a public company now called VeriTeQ Corporation. The terms of the agreements were made to benefit both the Company and VeriTeQ. The Company benefitted as its equity interest in VeriTeQ became an equity interest in a public company, allowing future realization of the Company’s holdings. No additional financial consideration was conveyed in conjunction with these agreements and amendments. The changes were also a condition to closing of the merger agreement set by Digital Angel, VeriTeQ’s merger partner.

 

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

 

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

 

Pursuant to the SPA, the Company sold its remaining shares of VeriTeQ common stock (871,754) and the convertible note owed from VeriTeQ to the Company (convertible into 135,793 shares of VeriTeQ common stock). Total proceeds from the sale were $750,000, which were received by November 18, 2013. On November 13, 2013, the aggregate market value of the 871,754 shares of VeriTeQ common stock was $1.8 million, and the aggregate market value of 135,793 shares of Common Stock underlying the promissory note was $276,000.

 

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

 

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

 

iglucose

 

The iglucose system uses machine to machine technology to automatically communicate a diabetic’s glucose readings to the iglucose online database. iglucose is intended to provide next generation, real-time data to improve diabetes management and help ensure patient compliance, data accuracy and insurance reimbursement. In November 2011, we obtained Federal Drug Administration of the United States Government (“FDA”) clearance.

 

On February 15, 2013, we entered into an agreement, or the SGMC Agreement, with SGMC, Easy Check, Easy-Check Medical Diagnostic Technologies Ltd., an Israeli company, and Benjamin Atkin, an individual, or Atkin, pursuant to which we licensed our iglucose™ technology to SGMC for up to $2 million based on potential future revenues of glucose test strips sold by SGMC. These revenues will range between $0.0025 and $0.005 per strip. A person with diabetes who tests three times per day will use over 1,000 strips per year. The parties to the SGMC Agreement were parties to that certain Easy Check Asset Purchase Agreement. We and Atkin were also parties to a consulting agreement dated as of February 10, 2010, which agreement was terminated upon entry into the SGMC Agreement.

 

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

 

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

 

6
 

 

(i) $0.0025 per strip sold until SGMC has paid aggregate Consideration of $1,000,000; and

 

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

 

GlucoChip

 

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

 

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

 

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

 

Breath Glucose Test

 

The breath glucose test is a patented non-invasive glucose detection system that measures acetone levels in a patient’s exhaled breath. The association between acetone levels in the breath and glucose is well documented, but previous data on the acetone/glucose correlation has been insufficient for reliable statistics. The breath glucose test detection system combines a proprietary chemical mixture of sodium nitroprusside with breath exhalate, which is intended to create a new molecular compound that can be measured with its patent pending technology. We believe that the use of a heavy molecule to generate a chemical reaction that can be reliably measured may prove the close correlation between acetone concentrations found in a patient’s exhaled breath and glucose found in his or her blood. This could eliminate a patient’s need to prick his or her finger multiple times per day to get a blood sugar reading. In the first quarter of 2012, we commenced the first clinical trial of the breath glucose test, which was held at Schneider Children’s Medical Center of Israel, a preeminent research hospital. The study is currently on hold pending a determination by the Company as to the potential changes in the study protocol. The purpose of the clinical study is to assess the feasibility of the breath glucose test compared to a standard invasive blood glucose meter and to assess the reliability of the breath glucose test in measuring blood glucose levels under conditions of altered blood glucose levels. The preliminary results of the first half of the study were non-conclusive. The development of the breath glucose test is currently on hold while the Company seeks an industry partner, licensor, or a strategic buyer to continue the project.

 

Sales, Marketing and Distribution

 

Our sales, marketing and distribution plan for our healthcare products is to align with large medical distribution companies, and either manufacture the products to their specification or license the products and underlying technology to them.

 

Manufacturing; Supply Arrangements

 

We have historically outsourced the manufacturing of all the hardware components of our systems to third parties. As of December 31, 2014, 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.

 

7
 

 

Environmental Regulation

 

We must comply with local, state, federal, and international environmental laws and regulations in the countries in which we do business, including laws and regulations governing the management and disposal of hazardous substances and wastes. We expect our operations and products will be affected by future environmental laws and regulations, but we cannot predict the effects of any such future laws and regulations at this time. Our distributors who place our products on the market in the European Union are required to comply with EU Directive 2002/96/EC on waste electrical and electronic equipment, known as the WEEE Directive. Noncompliance by our distributors with EU Directive 2002/96/EC would adversely affect the success of our business in that market. Additionally, we are investigating the applicability of EU Directive 2002/95/EC on the restriction of the use of certain hazardous substances in electrical and electronic equipment, known as the RoHS Directive which took effect on July 1, 2006. We do not expect the RoHS Directive will have a significant impact on our business.

 

Government Regulation

 

Regulation by the FDA

 

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, or FFDCA, or a premarket approval application, or PMA, approved by the FDA. Medical devices are classified into one of three classes — Class I, Class II or Class III — depending on the degree of risk to the patient associated with the medical device and the extent of control needed to ensure its safety and effectiveness. Devices deemed to pose low or moderate risks are placed in either Class I or II, respectively. The manufacturer of a Class II device is required to submit to the FDA a premarket notification requesting permission to commercially distribute the device and demonstrating that the proposed device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of a PMA. This process is known as 510(k) clearance. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device, are considered high risk and placed in Class III, requiring premarket approval.

 

Pervasive and Continuing Regulation . After a medical device is placed on the market, numerous regulatory requirements continue to apply. These include:

 

  quality system regulations, or QSR, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;

 

  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, or MDR, regulations, which require that a manufacturer report to the FDA if the manufacturer’s device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur;

 

  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.

 

8
 

 

Fraud and Abuse

 

We are subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and false claims laws. Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal and state healthcare programs, including Medicare, Medicaid and Veterans Affairs health programs. We have never been challenged by a government authority under any of these laws and believe that our operations are in material compliance with such laws. However, because of the far-reaching nature of these laws, there can be no assurance that we would not be required to alter one or more of our practices to be in compliance with these laws. In addition, there can be no assurance that the occurrence of one or more violations of these laws would not result in a material adverse effect on our financial condition and results of operations.

 

Anti-Kickback Laws

 

We may directly or indirectly be subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws. In particular, the federal healthcare program Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for or recommending a good or service, for which payment may be made in whole or part under federal healthcare programs, such as the Medicare and Medicaid programs. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs.

 

Federal False Claims Act

 

We may become subject to the Federal False Claims Act, or FCA. The FCA imposes civil fines and penalties against anyone who knowingly submits or causes to be submitted to a government agency a false claim for payment. The FCA contains so-called “whistle-blower” provisions that permit a private individual to bring a claim, called a qui tam action, on behalf of the government to recover payments made as a result of a false claim. The statute provides that the whistle-blower may be paid a portion of any funds recovered as a result of the lawsuit.

 

State Laws and Regulations

 

Many states have enacted laws similar to the federal Anti-Kickback Statute and FCA. The Deficit Reduction Act of 2005 contains provisions that give monetary incentives to states to enact new state false claims acts. The state Attorneys General are actively engaged in promoting the passage and enforcement of these laws. While the Federal Anti-Kickback Statute and FCA apply only to federal programs, many similar state laws apply both to state funded and to commercial health care programs. In addition to these laws, all states have passed various consumer protection statutes. These statutes generally prohibit deceptive and unfair marketing practices, including making untrue or exaggerated claims regarding consumer products. There are potentially a wide variety of other state laws, including state privacy laws, to which we might be subject. We have not conducted an exhaustive examination of these state laws.

 

Laws and Regulations Governing Privacy and Security

 

There are various federal and state laws and rules regulating the protection of consumer and patient privacy.  We have never been challenged by a governmental authority under any of these laws and believe that our operations are in material compliance with such laws.  However, because of the far reaching nature of these laws, there can be no assurance that we would not be required to alter one or more of our systems and data security procedures to be in compliance with these laws.  Our failure to protect health information received from customers could subject us to civil or criminal liability and adverse publicity and could harm or business and impair our ability to attract new customers.

 

U.S. Federal Trade Commission Oversight

 

An increasing focus of the United States Federal Trade Commission’s, or FTC, consumer protection regulation is the impact of technological change on protection of consumer privacy. Under the FTC’s statutory authority to prosecute unfair or deceptive acts and practices, the FTC vigorously enforces promises a business makes about how personal information is collected, used and secured.

 

Since 1999, the FTC has taken enforcement action against companies that do not abide by their representations to consumers of electronic security and privacy. More recently, the FTC has found that failure to take reasonable and appropriate security measures to protect sensitive personal information is an unfair practice violating federal law. In the consent decree context, offenders are routinely required to adopt very specific cyber security and internal compliance mechanisms, as well as submit to twenty years of independent compliance audits. Businesses that do not adopt reasonable and appropriate data security controls or that misrepresent privacy assurances to users have been subject to civil penalties as high as $22.5 million.

 

In 2009, the FTC issued rules requiring vendors of personal health records to notify customers of any breach of unsecured, individually identifiable health information.  Also, a third party service provider of such vendors or entities that experiences a breach must notify such vendors or entities of the breach.  If we experience a breach of our systems containing personal health records, we will be required to provide these notices and may be subject to penalties.  Violations of these requirements may be prosecuted by the FTC as an unfair or deceptive act or practice and could result in significant harm to our reputation.

 

9
 

 

Health Insurance Portability and Accountability Act of 1996 and the Health Information Technology for Economic and Clinical Health Act of 2009

 

The Health Insurance Portability and Accountability Act of 1996 and its implementing regulations, or HIPAA, govern how various entities and individuals can use and disclose protected health information.  If we begin transmitting individually identifiable health information in connection with certain standard transactions regulated by HIPAA, we would likely have to implement a HIPAA compliance program to ensure our uses and disclosures of health information are done in accordance with the regulations.  Under the federal Health Information Technology for Economic and Clinical Health Act, (the “HITECH Act”), we may be subject to certain federal privacy and security requirements relating to individually identifiable health information we maintain. We may be required to enter into written business associate agreements with certain health care providers and health plans relating to the privacy and security of protected health information, to the extent our customers are covered entities under HIPAA and to the extent we receive, use or disclose protected health information on their behalf. Under the HITECH Act, we would be required by federal law to comply with those business associate agreements, as well as certain privacy and security requirements found in HIPAA and the HITECH Act as they relate to our activities as a business associate.  If we are a covered entity or business associate under HIPAA and the HITECH Act, compliance with those requirements would require us to, among other things, conduct a risk analysis, implement a risk management plan, implement policies and procedures, and conduct employee training. The HITECH Act would also require us to notify patients or our customers, to the extent that they are covered entities subject to HIPAA, of a breach of privacy or security of individually identifiable health information. Breaches may also require notification to the Department of Health and Human Services and the media. Experiencing a breach could have a material impact on our reputation.  The standards under HIPAA and the HITECH Act could be interpreted by regulatory authorities in ways that could require us to make material changes to our operations.  Failure to comply with these federal privacy and security laws could subject us to civil and criminal penalties. Civil penalties can go as high as $50,000 per violation, with an annual maximum of $1.5 million for all violations of an identical provision in a calendar year.

 

State Legislation

 

Many states have privacy laws relating specifically to the use and disclosure of healthcare information. Federal healthcare privacy laws may preempt state laws that are less restrictive or offer fewer protections for healthcare information than the federal law if it is impossible to comply with both sets of laws. More restrictive or protective state laws still may apply to us, and state laws will still apply to the extent that they are not contrary to federal law. Therefore, we may be required to comply with one or more of these multiple state privacy laws. Statutory penalties for violation of these state privacy laws varies widely. Violations also may subject us to lawsuits for invasion of privacy claims, or enforcement actions brought by state Attorneys General. We have not conducted an exhaustive examination of these state laws.

 

Many states currently have laws in place requiring organizations to notify individuals if there has been unauthorized access to certain unencrypted personal information. Several states also require organizations to notify the applicable state Attorney General or other governmental entity in the event of a data breach, and may also require notification to consumer reporting agencies if the number of individuals involved surpasses a defined threshold. We may be required to comply with one or more of these notice of security breach laws in the event of unauthorized access to personal information. In addition to statutory penalties for a violation of the notice of security breach laws, we may be exposed to liability from affected individuals.

  

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, or Affordable Care Act, will likely have a dramatic effect on health care financing and insurance coverage for Americans.  A portion of the Affordable Care Act, referred to as the "Physician Sunshine Payment" provisions, requires applicable manufacturers and distributors of drugs, devices, biological, or medical supplies covered under Medicare, Medicaid or the Children's Health Insurance Program to report annually to the Department of Health and Human Services certain payments or other transfers of value to physicians and teaching hospitals. They also require applicable manufacturers and applicable group purchasing organizations to report certain information regarding the ownership or investment interests held by physicians or the immediate family members of physicians in such entities.  Final regulations implementing the Physician Sunshine Payment provisions were issued on February 8, 2013 and are effective on April 9, 2013. The required data 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.   In light of the scope of health care reform and the Affordable Care Act, and the uncertainties associated with how it will be implemented on the state and federal level, we cannot predict its impact on the PositiveID at this time.

 

10
 

 

Interoperability Standards

 

The HITECH Act requires meaningful use of certified health information technology products in order to receive certain stimulus payments or incentives from the federal government.  Regulations implementing these meaningful use standards are in various stages of development.  There is an increasing need for health care providers, government agencies, and others in the health care industry to use computer communication and recordkeeping technology that is compatible with other systems.  Many states and providers are developing systems for health information exchange.  To the extent that customers, government entities, and other stakeholders demand that our products, such as iglucose , be compatible with various communication systems, we could be required to incur costs and delays in developing and upgrading our software and products.

 

Competitive Conditions

 

We compete with many companies in the molecular diagnostics industry and the homeland defense and clinical markets. We believe that Luminex Corporation, Cepheid, Roche, BioMerieux, and Life Technologies Corporation will be competitors for our products. Key characteristics of our markets include long operating cycles and intense competition, which is evident through the number of bid protests (competitor protests of U.S. government procurement awards) and the number of competitors bidding on program opportunities.  It is common in the homeland defense industry for work on major programs to be shared market among a number of companies. A company competing to be a prime contractor may, upon ultimate award of the contract to another competitor, become a subcontractor for the ultimate prime contracting company. It is not unusual to compete for a contract award with a peer company and, simultaneously, perform as a supplier to or a customer of that same competitor on other contracts, or vice versa.

 

Research and Development

 

The principal objective of our research and development program is to develop high-value molecular diagnostic products such as M-BAND and Firefly Dx. We focus our efforts on four main areas: 1) 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. Total research and development expense was $588,000 and $691,000 for the years ended December 31, 2014 and 2013, respectively.

 

Employees

 

As of March 19, 2015, we had 9 full-time employees, of whom 4 were in management, finance and administration, 1 in marketing and business development, and 4 in research and development. We consider our relationship with our employees to be satisfactory and have not experienced any interruptions of our operations as a result of labor disagreements. None of our employees are represented by labor unions or covered by collective bargaining agreements.    

 

Item 1A. Risk Factors

 

The following risks and the risks described elsewhere in this Annual Report on Form 10-K, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” could materially affect our business, prospects, financial condition, operating results and cash flows. If any these risks materialize, the trading price of our common stock could decline, and you may lose all or part of your investment.

 

Risks Related to the Operations and Business of PositiveID

 

We have a history of losses and expect to incur additional losses in the future. We are unable to predict the extent of future losses or when we will become profitable .

 

For the years ended December 31, 2014 and 2013, we experienced net losses of $7.2 million and $4.3 million, respectively and our accumulated deficit at December 31, 2014 was $132.8 million.   Until one or more of the products is successfully brought to market, we do not anticipate generating significant revenue or gross profit.   We have submitted, or are the process of submitting, bids on various potential new U.S. Government contracts; however, there can be no assurance that we will be successful in obtaining any such new or other contracts.

 

We expect to continue to incur operating losses for the near future. Our ability in the future to achieve or sustain profitability is based on a number of factors, many of which are beyond our control. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods.

 

Our financial statements indicate conditions exist that raise substantial doubt as to whether we will continue as a going concern.

 

Our annual audited financial statements for the years ended December 31, 2014 and 2013 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.

 

11
 

 

Government contracts and subcontracts are generally subject to a competitive bidding process that may affect our ability to win contract awards or renewals in the future.

 

We bid on government contracts through a formal competitive process in which we may have many competitors. If awarded, upon expiration, these contracts may be subject, once again, to a competitive renewal process if applicable. We may not be successful in winning contract awards or renewals in the future. Our failure to renew or replace existing contracts when they expire could have a material adverse effect on our business, financial condition, or results of operations.

 

Contracts and subcontracts with United States government agencies that we may be awarded will be subject to competition and will be awarded on the basis of technical merit, personnel qualifications, experience, and price. Our business, financial condition, and results of operations could be materially affected to the extent that U.S. government agencies believe our competitors offer a more attractive combination of the foregoing factors. In addition, government demand and payment for our products may be affected by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting demand for our products. In particular, the, next generation BioWatch program is a very large program, under which we intend to bid as a subcontractor to The Boeing Company. Our success in this process is a very important factor in our ability to increase stockholder value.

 

Compliance with changing regulations concerning corporate governance and public disclosure may result in additional expenses.

 

There have been changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act, and new regulations promulgated by the SEC. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with evolving laws, regulations and standards are likely to continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. Our board members and executive officers could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which could harm our business. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies, we could be subject to liability under applicable laws or our reputation may be harmed.

 

Changes in the regulatory environment could adversely affect our business, financial condition or results of operations.

 

Our operations are subject to varying degrees of regulation by the 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 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 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 19, 2015, our current directors and executive officers beneficially owned, in the aggregate, approximately 80% of our outstanding voting securities, including 46.5% 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.  

 

12
 

 

The Company’s officers, directors and management hold preferred shares that give them voting control of the Company.

 

On September 30, 2013, the Company issued 413 shares of Series I Preferred Stock to its current officers, directors and management (a total of six people). On December 31, 2013 and January 14, 2014, an additional 587 shares of Series I was issued for 2013 and 2014 management and director compensation. On January 12, 2015, an additional 625 shares of Series I was issued for 2014 management incentive compensation and 2015 director compensation. Each of the Series I preferred is convertible into the Company’s Common Stock, at stated value plus accrued dividends, at the closing bid price on the issuance date, any time at the option of the holder and by the Company in the event that the Company’s closing stock price exceeds 400% of the conversion price for twenty consecutive trading days. The Series I Preferred Stock has voting rights equivalent to twenty-five votes per common share equivalent.

 

The Series I preferred shares issued to all four current members of the Board and the three non-directors who are part of management are as follows:

 

Name   Position   Preferred  
Series I Issued
    Common Shares
Issuable
Upon
Conversion
    Total  
Votes
 
William J. Caragol   Chairman and Chief Executive Officer     856       32,630,716       815,767,895  
Michael E. Krawitz   Director     126       4,486,934       112,173,351  
Jeffrey S. Cobb   Director     113       4,094,065       102,351,624  
Ned L. Siegel   Director     89       3,368,768       84,219,203  
Lyle Probst   President     290       11,196,869       279,921,722  
Allison F. Tomek   SVP of Corporate Development     101       3,831,807       95,795,166  
Kimothy Smith   Chief Technology Advisory     50       1,872,856       46,821,410  
Total         1,625      

61,482,015

     

1,537,050,371

 

 

As of March 19, 2015, our officers, directors and management now have an aggregate of 1,541,240,713 million votes on any matter brought to a vote of the holders of our common stock, including an aggregate 1,537,050,371 million votes, or 80% of the total vote, through the ownership of Series I Preferred Stock, and 4,691,890 million votes through the ownership of shares of our common stock. As a result, our officers, directors, and management have voting control over the 1,545,962,603 million of the outstanding voting shares of the Company (excluding exercisable Stock options ).  

 

As a result, 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.

 

13
 

 

Our industry changes rapidly as a result of technological and product developments, which may quickly render our product candidates less desirable or even obsolete. If we are unable or unsuccessful in supplementing our product offerings, our revenue and operating results may be materially adversely affected.

 

The industry in which we operate is subject to rapid technological change. The introduction of new technologies in the market, including the delay in the adoption of these technologies, as well as new alternatives for the delivery of products and services will continue to have a profound effect on competitive conditions in this market. We may not be able to develop and introduce new products, services and enhancements that respond to technological changes on a timely basis. If our product candidates are not accepted by the market as anticipated, if at all, our business, operating results, and financial condition may be materially and adversely affected.

 

Risks Occasioned by the Xmark Transaction

 

We may be liable for pre-closing period tax obligations of Xmark.

 

In January 2010, Stanley, who purchased Xmark from us, received a notice from the Canadian Revenue Agency, (the “CRA”), that the CRA would be performing a review of Xmark’s Canadian tax returns for the periods 2005 through 2008. This review covers all periods that we owned Xmark. In February 2011, and as revised on November 9, 2011, Stanley received a notice from the CRA that the CRA completed its review of the Xmark returns and was questioning certain deductions on the tax returns under review. In November and December 2011, the CRA and the Ministry of Revenue of the Province of Ontario issued notices of reassessment confirming the proposed adjustments. The total amount of the income tax reassessments for the 2006-2008 tax years, including both provincial and federal reassessments, plus interest, was approximately $1.4 million.  On January 20, 2012, we received an indemnification claim notice from Stanley related to the matter. We do not agree with the position taken by the CRA and filed a formal appeal related to the matter on March 8, 2012. In addition, on March 28, 2012, Stanley received assessments for withholding taxes on deemed dividend payments in respect of the disallowed management fees totaling approximately $0.2 million, for which we filed a formal appeal on June 7, 2012. In October 2012, the Company submitted a Competent Authority filing to the U.S. IRS seeking relief in the matter.  In connection with the filing of the appeals, Stanley was required to remit an upfront payment of a portion of the tax reassessment totaling approximately $950,000. The Company has also filed a formal appeal related to the withholding tax assessments, pursuant to which Stanley was required to remit an additional upfront payment of approximately $220,000. Pursuant to a letter agreement dated March 7, 2012, we have agreed to repay Stanley for the upfront payment, plus interest at the rate of five percent per annum, in 24 equal monthly payments beginning on June 1, 2012. To the extent that we and Stanley reach a successful resolution of the matter through the appeals process, the upfront payment (or a portion thereof) will be returned to Stanley or us as applicable. As of December 31, 2013 the Company had made payments to Stanley of $385,777 and had a remaining balance owed to Stanley of $819,677 related to their upfront payments to CRA in 2012 prior to the final notice received on February 28, 2014 from the CRA, see below.

 

On February 28, 2014 the Company received final notice from the CRA. The final notice accepted a portion of the Company’s previously disallowed deductions and disallowed others. The Company has determined that it will not further appeal the decision in the final notice. The Company and Stanley are in the process of submitting the amended tax returns necessary to effect the final adjustments. The Company recorded a tax expense of $371,000 for the year ended December 31, 2013 to reflect this adjusted tax obligation to Stanley as of December 31, 2013. During 2014 we made payments of $20,000 to Stanley and will continue to make monthly payments until the balance is paid in full. Based on management’s estimate the Company’s liability to Stanley is approximately $480,000 as of December 31, 2014. Based on our review of the correspondence and evaluation of the supporting detail, we believe that we have adequately accrued for the liability resulting from the final notice.

 

Industry and Business Risks Related to Our Legacy Healthcare Businesses

  

The sale and license of our legacy healthcare products may not produce royalty streams.

 

In 2013 we sold the assets related to our VeriChip business to VeriTeQ Corporation and licensed our iglucose technology to Smart Glucose Meter. In 2014 we also transferred the rights to the GlucoChip technology to VeriTeQ. 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. Further, we will continue to seek a license partner for our breath glucose detection system and its underlying patent, which was granted in 2014. If we are unable to find a license or sale partner for this product we may not receive any return from the breath glucose detection system.

 

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 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. If VeriTeQ is unable to fulfill indemnity obligations, we would be responsible for payment of such liabilities, which could have a material adverse impact on our financial condition.

 

14
 

  

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 2015; 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 975,000,000 shares of capital stock consisting of 970,000,000 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 19, 2015, there are 221,441,067 shares of our common stock and 1,625 of our Series I preferred stock outstanding. There are 4,696,288 shares of our common stock reserved for issuance pursuant to stock option agreements. We also have 4,490,000 shares of our common stock issuable upon the exercise of outstanding warrants. We also have convertible notes with principal and accrued interest balances of $2,441,213 as of March 19, 2015. These notes and our Series I preferred stock are convertible into common stock in the future at prices determined at the time of conversion. The Series I and convertible notes would convert into shares of common stock, based on the closing bid price of $0.026 on March 19, 2015, as follows:  

 

    Principal/     Common Share Conversion  
    Liquidation     At Current     At 25%     At 50%     At 75%  
    Value     Market     Discount     Discount     Discount  
                               
Series I   $ 1,705,129       1,705,129       1,705,129       1,705,129       1,705,129 (1)
Convertible Notes     2,441,213       91,841,622       122,455,496       183,683,245       367,366,489 (2)
                                         
    $ 4,146,343       93,546,752       124,160,626       185,388,374       369,071,619  

 

  (1) Represents liquidation value, including accrued dividends, on (i) 413 shares of Series I, converted at $0.036; (ii) 75 shares of Series I converted at $0.0250; (iii) 512 shares of Series I converted at $0.0245; and (iv) 625 shares of Series I, converted at $0.027, which are fixed conversion prices.
  (2) The convertible notes are convertible into common stock of the company at prices determined, in the future, at the time of conversion, at discounts of between 37.5% and 40% of the market price or at the lesser of a fixed amount or discount to market. This table includes common shares conversions at the closing bid price of $0.026 on March 19, 2015, and at discounts of 25%, 50% and 75% from the closing bid price on March 19, 2015. 

 

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.

 

In July 2008 we declared, and in August 2008 we paid, a special cash dividend of $15.8 million on our capital stock. Any future determination with respect to the payment of dividends will be at the discretion of the Board 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 Preferred Stock prohibit the payment of cash dividends on our common stock while any such shares of preferred stock are outstanding.

 

15
 

 

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 lease that expires on August 31, 2015.  Our operations are based in Pleasanton, California, where we lease approximately 6,250 square feet of lab and office space under a lease that expires on April 30, 2015.

 

Item 3. Legal Proceedings

 

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

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

16
 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is quoted on the OTC Bulletin Board under the symbol “PSID.”  On March 19, 2015, the last reported bid price of our common stock was $0.026 per share.  The following table presents the high and low bid price for our common stock for the periods indicated:

 

Fiscal Year Ended December 31, 2014   High     Low  
Quarter ended December 31, 2014   $ 0.09     $ 0.03  
Quarter ended September 30, 2014   $ 0.07     $ 0.03  
Quarter ended June 30, 2014   $ 0.09     $ 0.05  
Quarter ended March 31, 2014   $ 0.14     $ 0.02  

 

Fiscal Year Ended December 31, 2013   High     Low  
Quarter ended December 31, 2013   $ 0.07     $ 0.02  
Quarter ended September 30, 2013   $ 0.13     $ 0.03  
Quarter ended June 30, 2013   $ 0.58     $ 0.13  
Quarter ended March 31, 2013   $ 0.59     $ 0.37  

 

Holders

 

According to the records of our transfer agent, as of March 19, 2015, there were approximately 74 holders of record of our common stock, which number does not reflect beneficial stockholders who hold their stock in nominee or “street” name through various brokerage firms.

 

Dividend Policy

 

In July 2008, we declared and in August 2008, we paid a special cash dividend of $15.8 million on our capital stock. Any future determination with respect to the payment of dividends on our common stock will be at the discretion of our 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 C, Series F and Series H Preferred Stock prohibit the payment of cash dividends on our common stock while any such shares of preferred stock are outstanding.

 

Equity Compensation Plan Information

 

The following table presents information regarding options and rights outstanding under equity our compensation plans as of December 31, 2014:

 

Plan Category(1)   (a)
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
    (b)
Weighted-
average
exercise price
per share of
outstanding
options,
warrants and
rights
    (c)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))
 
                   
Equity compensation plans approved by security holders     406,288     $ 0.11       1,179,766  
Equity compensation plans not approved by security holders(2)     2,450,000     $ 31.84        
Total     2,856,288     $ 0.79       1,179,766  

 

  (1) A narrative description of the material terms of our equity compensation plans is set forth in Note 7 to our consolidated financial statements for the year ended December 31, 2014.

  (2) We have made grants outside of our equity plans and have outstanding warrants exercisable for 4,490,000 shares of our common stock. These warrants were granted as compensation for financing transactions or for the rendering of consulting services.

 

17
 

 

Recent Sales of Unregistered Securities

 

Except for provided below, all unregistered sales of our securities were previously disclosed in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.

 

1. On October 2, 2014, we issued 1,100,000 shares of our common stock to JMJ Financial in connection with the conversion of a promissory note.

 

2. On October 2, 2014, we issued 1,450,685 shares of our common stock to Union Capital, LLC in connection with the conversion of a promissory note.

 

3. On October 3, 2014, we issued 279,117 shares of our common stock to Union Capital, LLC in connection with the conversion of a promissory note.

 

4. On October 3, 2014, we issued 1,273,656 shares of our common stock to Union Capital, LLC in connection with the conversion of a promissory note.

 

5. On October 7, 2014, we issued 555,556 shares of our common stock to Adar Bays, LLC in connection with the conversion of a promissory note.

 

6. On October 7, 2014, we issued 6,242,112 shares of our common stock to Ironridge Global IV, LLC pursuant to the preferred stock agreement dated August 26, 2013.

 

7. On October 7, 2014, we issued 555,555 shares of our common stock to Coventry Enterprises, LLC in connection with the conversion of a promissory note.

 

8. On October 1, 2014, we issued 800,000 shares of our common stock to a consultant pursuant to a consulting agreement.

 

9. On October 9, 2014, we issued 1,056,739 shares of our common stock to JMJ Financial in connection with the conversion of a promissory note.

 

10. On October 13, 2014, we issued 2,237,808 shares of our common stock to Union Capital, LLC in connection with the conversion of a promissory note.

 

11. On October 13, 2014, we issued 1,711,808 shares of our common stock to LG Capital Funding, LLC in connection with the conversion of a promissory note.

 

12. On October 15, 2014, we issued 975,610 shares of our common stock to KBM Worldwide, Inc. in connection with the conversion of a promissory note.

 

13. On October 15, 2014, we issued 58,051 shares of our common stock to LG Capital Funding, LLC in connection with the conversion of a promissory note.

 

14. On October 16, 2014, we issued 2,127,103 shares of our common stock to KBM Worldwide, Inc. in connection with the conversion of a promissory note.

 

15. On October 17, 2014, we issued 3,400,000 shares of our common stock to JMJ Financial in connection with the conversion of a promissory note.

 

16. On October 20, 2014, we issued 2,333,333 shares of our common stock to Coventry Enterprises, LLC in connection with the conversion of a promissory note.

 

17. On October 20, 2014, we issued 1,600,870 shares of our common stock to Union Capital, LLC in connection with the conversion of a promissory note.

 

18
 

  

18. On October 20, 2014, we issued 1,322,751 shares of our common stock to Adar Bays, LLC in connection with the conversion of a promissory note.

 

19. On October 21, 2014, we issued 1,316,349 shares of our common stock to Adar Bays, LLC in connection with the conversion of a promissory note.

 

20. On October 22, 2014, we issued 697,785 shares of our common stock to Adar Bays, LLC in connection with the conversion of a promissory note.

 

21. On October 22, 2014, we issued 180,000 shares of our common stock to a consultant pursuant to a consulting agreement.

 

22. On October 23, 2014, we issued 4,988,220 shares of our common stock to Ironridge Global IV, LLC pursuant to the preferred stock agreement dated August 26, 2013.

 

23. On October 27, 2014, we issued 2,890,411 shares of our common stock to Auctus Private Equity Fund, LLC in connection with the conversion of a promissory note.

 

24. On October 27, 2014, we issued 1,126,126 shares of our common stock to Adar Bays, LLC in connection with the conversion of a promissory note.

 

25. On October 31, 2014, we issued 3,510,704 shares of our common stock to JMJ Financial in connection with the conversion of a promissory note.

 

26. On November 3, 2014, we issued 496,032 shares of our common stock to Adar Bays, LLC in connection with the conversion of a promissory note.

 

27. On November 5, 2014, we issued 258,018 shares of our common stock to Union Capital, LLC in connection with the conversion of a promissory note.

 

28. On November 5, 2014, we issued 300,000 shares of our common stock to a consultant pursuant to a consulting agreement.

 

29. On November 10, 2014, we issued 545,635 shares of our common stock to Adar Bays, LLC in connection with the conversion of a promissory note.

 

30. On November 11, 2014, we issued 1,450,172 shares of our common stock to Adar Bays, LLC in connection with the conversion of a promissory note.

 

31. On November 12, 2014, we issued 775,196 shares of our common stock to Union Capital, LLC in connection with the conversion of a promissory note.

 

32. On November 17, 2014, we issued 1,050,311 shares of our common stock to Union Capital, LLC in connection with the conversion of a promissory note.

 

33. On November 21, 2014, we issued 527,190 shares of our common stock to Union Capital, LLC in connection with the conversion of a promissory note.

 

34. On December 2, 2014, we issued 528,407 shares of our common stock to Union Capital, LLC in connection with the conversion of a promissory note.

 

35. On December 8, 2014, we issued 435,034 shares of our common stock to Union Capital, LLC in connection with the conversion of a promissory note.

 

36. On December 11, 2014, we issued 66,915 shares of our common stock to Union Capital, LLC in connection with the conversion of a promissory note.

 

19
 

 

37. On December 22, 2014, we issued 525,315 shares of our common stock to Union Capital, LLC in connection with the conversion of a promissory note.

 

38. On December 24, 2014, we issued 1,006,575 shares of our common stock to Union Capital, LLC in connection with the conversion of a promissory note.

 

We made the foregoing stock issuances in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.

 

Item 6. Selected Financial Data

 

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

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited annual financial statements and the notes to those financial statements included elsewhere in this Annual Report on Form 10-K.

 

Overview

 

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

 

On May 23, 2011, we entered into a Stock Purchase Agreement to acquire MFS, pursuant to which MFS became a wholly-owned subsidiary. MFS specialized 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.

 

Since its inception, and prior to acquisition, PositiveID, through its wholly-owned subsidiary MFS, has received over $50 million in government grants and contract work for the Department of Defense, DHS, the Federal Bureau of Investigation, the National Aeronautics and Space Administration, the Defense Advanced Research Projects Agency and industrial clients.  We hold a substantial portfolio of 18 patents/patents pending primarily for the automation of biological detection using real-time analysis for the rapid, reliable and specific identification of pathogens.

 

Beginning in 2011 and continuing through 2013, as a part of our refocusing our business, we set out to (1) align ourselves with strong strategic partners to prepare our M-BAND product for the DHS’s next generation BioWatch program, which has been estimated to be a $3 billion program over five years; (2) identify a research and development contract to complete the development of our clinical/point of demand diagnostic platform, the Firefly system; and (3) reduce our operating costs to focus solely on those initiatives. The results of these efforts continue on an ongoing basis through 2015.

 

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

  

Results of Operations

 

Overview

 

The Company operates in a single market segment – molecular diagnostics and detection. 

 

20
 

 

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

 

Revenue

 

We reported $945,000 and nil revenue from continuing operations for the years ended December 31, 2014 and 2013. On March 28, 2014 the Company entered into an agreement, in the form of a purchase order, from UTC Aerospace Systems (“UTAS”) to support a contract for the U.S. Department of Defense (“DoD”). Pursuant to the agreement, work commenced in April 2014 and is expected to be completed in early 2015. In July 2014 the Company received an additional purchase order to increase the scope and value of the agreement. The terms of this fixed price agreement include a total value of $1,008,000 to PositiveID, paid in monthly installments between April and October, 2014 with the work expected to be completed in early 2015.

 

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

 

  The Company has deferred the $2.5 million received in conjunction with the Boeing License Agreement and anticipates recognizing the entire $2.5 million fee as revenue in accordance with applicable accounting literature and SEC guidance.  The Company continues to bid on various potential new U.S. Government contracts; however, there can be no assurance that we will be successful in obtaining any such contracts.

 

Direct Labor

 

Direct labor consists of compensation expense for employees and consultants working directly on the Company’s revenue producing agreements. Direct labor was $294,000 and nil for years ended December 31, 2014 and 2013, respectively, related to the contract discussed above, on which work began in April 2014.

     

Selling, General and Administrative Expense

 

Selling, general and administrative expense consists primarily of compensation for employees in executive, sales, marketing and operational functions, including finance and accounting and corporate development. Included in selling, general and administrative expense is all non-cash, equity based compensation. Other significant costs include depreciation and amortization, professional fees for accounting and legal services, consulting fees and facilities costs.

  

Selling, general and administrative expense increased by approximately $50,000, or 1.2%, for the year ended December 31, 2014 compared to the year ended December 31, 2013.

 

Research and Development

 

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

 

Research and development expense decreased by approximately $103,000, or 14.9%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The decrease was primarily attributable to the increase in direct labor, or allocation of labor efforts to revenue producing activities related to our molecular diagnostic products.

 

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

 

The change in contingent earn-out liability increased by $383,000 or 292%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase was primarily attributed to the change, or decrease, in the fair-value of the contingent earn-out liability on December 31, 2014 which is the end of the earn out period. As the earn-out period is now completed, the contingent earn-out liability has been reduced to nil. This is a non-cash income/expense item.

 

The change in fair value of embedded conversion option liability increased by approximately $198,000 or 100%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase was primarily attributed to note inception date fair value charged to other expense and the change in the fair-value of the derivative liability in the year ended December 31, 2014. This is a non-cash income/expense item.

 

Interest and Other Income (Expense) (net)

 

Interest expense increased by approximately $2.4 million or 366%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase was primarily attributed to the amortization of fair value premiums and debt discounts related to the increased level of borrowing, through convertible notes, in the year ended December 31, 2014. The amortization of fair value premiums and debt discounts are non-cash income/expense items.

 

21
 

 

Other income, net, decreased by approximately $1.5 million or 100%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The decrease was primarily attributed to the 2013 gain on the transfer of VeriTeQ shares which had cost basis of $0 to settle $590,000 of accrued compensation and the realization of a $781,000 gain on sale of VeriTeQ common shares and note which also had cost bases of $0.

 

Beneficial Conversion Dividend on Preferred Stock

 

Beneficial conversion dividend on preferred stock for the years ended December 31, 2014 and 2013 was approximately $0.9 and $9.0 million, respectively.  This amount in both periods is a non-cash charge.  The decrease of $8.1 million is primarily the result of decreased Series F preferred conversions during the year ended December 31, 2014 compared to the year ended December 31, 2013.

 

Liquidity and Capital Resources

 

As of December 31, 2014, cash and cash equivalents totaled approximately $145,000 compared to cash and cash equivalents of approximately $165,000 at December 31, 2013.

 

Cash Flows from Operating Activities

 

Net cash used in operating activities totaled approximately $2.6 million during the year ended December 31, 2014 and approximately $2.1 million during the year ended December 31, 2013, primarily to fund operating losses. This increase in cash used in operating activities was primarily the result of efforts to reduce current liabilities, and the receipt of $1.5 million from Boeing related to the Boeing License Agreement in 2013.

 

Cash Flows from Investing Activities

 

Cash flow used in investing activities were not significant for the year ended December 31, 2014 and was $778,000 of cash provided by investing activities primarily from sale of VeriTeQ common stock and note for the year ended December 31, 2013.

 

Cash Flows from Financing Activities

 

Financing activities provided net cash of approximately $2.6 million and $1.4 million during the years ended December 31, 2014 and 2013, respectively, primarily related to proceeds from the issuance of convertible notes and the sale of Series F Preferred Stock.

 

Financial Condition

 

As of December 31, 2014, we had a working capital deficiency of approximately $8.1 million and an accumulated deficit of approximately $132.8 million, compared to a working capital deficit of approximately $5.6 million and an accumulated deficit of approximately $124.6 million as of December 31, 2013. The decrease in working capital was primarily due to operating losses for the period, offset by cash received from an agreement, in a form of a purchase order, from with UTC Aerospace Systems to support a contract for the DoD (“UTAS Agreement”), and capital raised through convertible debt financings.

 

 On March 28, 2014 the Company entered into an agreement, amended and augmented in July 2014, in the form of a purchase order, from UTAS to support a contract for the DoD. Pursuant to the agreement, work commenced in April 2014 and was substantially complete by early 2015. The terms of this fixed price agreement include a total value of $1,008,000 to PositiveID, paid in monthly installments between April and October, 2014.

 

We have incurred operating losses prior to and since the merger that created PositiveID. The current operating losses are the result of research and development expenditures, selling, general and administrative expenses related to our molecular diagnostics and detection products.  We expect our operating losses to continue through 2015. These conditions raise substantial doubt about our ability to continue as a going concern.

 

Our ability to continue as a going concern is dependent upon our ability to obtain financing to fund the continued development of our products and to support working capital requirements. Until we are able to achieve operating profits, we will continue to seek to access the capital markets.  In 2013 and 2014, we raised approximately $1.8 and $2.7 million, respectively from the issuance of convertible preferred stock and convertible debt. In addition, we received $1.5 million under the Boeing License in 2013 and $1.0 million in 2014 under the UTAS Agreement.    

 

On November 25, 2014 the Company closed a financing transaction by entering into a Securities Purchase Agreement with an accredited investor for an aggregate subscription amount of $4,000,000 (the “ Purchase Price ”). Pursuant to the Securities Purchase Agreement, the Company shall issue a series of 4% Original Issue Discount Senior Secured Convertible Promissory Note (collectively, the “ Notes ”) to the Purchaser. The Purchase Price will be paid in eight equal monthly payments of $500,000. Each individual Note will be 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 Securities Purchase Agreement. 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. The use of proceeds from this financing are intended for the completion of the breadboard prototype of the Company’s Firefly Dx cartridge, restructuring of the Company’s existing convertible debt, and general working capital. As of March 19, 2015 the first four of eight monthly tranches have been funded.

 

22
 

 

During 2015 and 2016, we will need to raise additional capital, including capital not currently available under our current financing agreements in order to execute our business plan.

 

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.

 

Critical Accounting Policies and Estimates

 

The following are descriptions of the accounting policies that our management believes involve a high degree of judgment and complexity, and that, in turn, could materially affect our consolidated financial statements if various estimates and assumptions made in connection with the application of such policies were changed significantly. The preparation of our consolidated financial statements requires that we make certain estimates and judgments that affect the amounts reported and disclosed in our consolidated financial statements and related notes. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

 

Revenue Recognition

 

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

 

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

 

In October 2009, the Financial Accounting Standard Board (“FASB”) issued amended revenue recognition guidance for arrangements with multiple deliverables. The new guidance requires the use of management’s best estimate of selling price for the deliverables in an arrangement when vendor specific objective evidence, vendor objective evidence or third party evidence of the selling price is not available. In addition, excluding specific software revenue guidance, the residual method of allocating arrangement consideration is no longer permitted, and an entity is required to allocate arrangement consideration using the relative selling price method.

 

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

 

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

 

  (1) Revenues for professional services, which are of short term duration, are recognized when services are provided,

 

  (2) 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.

 

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.

 

Intangible Assets

 

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.

 

23
 

 

In assessing potential impairment of the intangible assets and goodwill recorded in connection with the MFS acquisition as of December 31, 2014, we considered the likelihood of future cash flows attributable to such assets, including but not limited to cash received from Boeing and the probability and extent of our participation in the DHS’s next generation BioWatch program and the what we believe to be a large market opportunity for our Firefly Dx product, once development is complete with regard to our intangible assets. We evaluated goodwill in accordance with the market capitalization method . Based on our analysis, we have concluded based on information currently available, that no impairment of the intangible assets or goodwill exists as of December 31, 2014.

 

Stock-Based Compensation

 

Stock-based compensation expense is recognized using the fair-value based method for all awards granted. Compensation expense for employees is recognized over the requisite service period based on the grant-date fair value of the awards. Forfeitures of stock-based grants are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

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. 

 

Accounting for Income Taxes

 

We use the liability method of accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided to reduce deferred tax assets to the amount of estimated future tax benefit when it is more likely than not that some portion of the deferred tax assets will not be realized. The income tax provision or credit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

 

We use a two-step approach to recognizing and measuring tax benefits when the benefits’ realization is uncertain. The first step is to determine whether the benefit is to be recognized, and the second step is to determine the amount to be recognized:

 

  · income tax benefits are recognized when, based on the technical merits of a tax position, the entity believes that if a dispute arose with the taxing authority and were taken to a court of last resort, it is more likely than not (i.e., a probability of greater than 50 percent) that the tax position would be sustained as filed; and

 

  · if a position is determined to be more likely than not of being sustained, the reporting enterprise recognizes the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority.

 

We continue to fully recognize our tax benefits, which are offset by a valuation allowance to the extent that it is more likely than not that the deferred tax assets will not be realized. We have analyzed our filing positions in all of the foreign, federal and state jurisdictions where the Company is required to file income tax returns, as well as all open tax years in these jurisdictions. As a result, we have not recorded a tax liability and have no unrecognized tax benefits as of December 31, 2014 or 2013, other than a repayment of Canadian tax obligations advance by Stanley.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

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

 

Item 8. Financial Statements and Supplementary Data

 

The consolidated financial statements, including supplementary data and the accompanying report of independent registered public accounting firm filed as part of this Annual Report on Form 10-K, are listed in the Index to Consolidated Financial Statements and Financial Statement Schedules on page F-1.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

On July 1, 2014, the Company dismissed its independent registered public accounting firm, EisnerAmper LLP (“Eisner”).

 

24
 

 

On July 1, 2014, the Company engaged Salberg & Company, P.A. (“Salberg”) as its new independent registered public accounting firm. During the year ended December 31, 2013 and prior to July 1, 2014 (the date of the new engagement), we did not consult with Salberg regarding (i) the application of accounting principles to a specified transaction, (ii) the type of audit opinion that might be rendered on the Company’s financial statements by Salberg, in either case where written or oral advice provided by Salberg would be an important factor considered by us in reaching a decision as to any accounting, auditing or financial reporting issues or (iii) any other matter that was the subject of a disagreement between us and our former auditor or was a reportable event (as described in Items 304(a)(1)(iv) or Item 304(a)(1)(v) of Regulation S-K, respectively). 

 

Our Board of Directors participated in and approved the decision to change independent accountants. Through the period covered by the financial audit for the years ended December 31, 2013, December 31, 2012 and through July 1, 2014 (date of dismissal), there have been no disagreements with Eisner on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Eisner would have caused them to make reference thereto in their report on the financial statements.

 

Item 9A. Controls and Procedures

 

Disclosure Controls and Procedures

 

Evaluation of Disclosure Controls . We evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” as defined in Rule 13a-15(e) under the Exchange Act as of December 31, 2014. This evaluation (the “disclosure controls evaluation”) was done under the supervision and with the participation of management, including the person(s) performing the function of our chief executive officer (“CEO”) and acting chief financial officer (“CFO”). Rules adopted by the SEC require that in this section of this Report we present the conclusions of the CEO and CFO about the effectiveness of our disclosure controls and procedures as of December 31, 2014 based on the disclosure controls evaluation.

 

  Objective of Controls. Our disclosure controls and procedures are designed so that information required to be disclosed in our reports filed under the Exchange Act, such as this Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to our management, including the CEO and acting CFO, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives, and management necessarily is required to use its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

 

Conclusion . Based upon the disclosure controls evaluation, our CEO and acting CFO had concluded that, as of December 31, 2014, our disclosure controls and procedures were effective to provide reasonable assurance that the foregoing objectives are achieved.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control system is designed to provide reasonable assurance to our management and Board regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

Under the supervision and with the participation of management, including the CEO and acting CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting, as of December 31, 2014, based upon the framework in Internal Control — Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation under the framework in Internal Control — Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2014.

 

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Annual Report.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act that occurred during the year ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information

 

None.

 

25
 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

Directors

 

Our directors, their ages and business experience, as of March 19, 2015, are set forth below:

 

Name   Positions with the Company
William J. Caragol   Chairman, Chief Executive Officer, and Acting Chief Financial Officer
Jeffrey S. Cobb   Director
Michael E. Krawitz   Director
Ned L. Siegel   Director

 

William J. Caragol, 47 , has served as our Chief Executive Officer since August 26, 2011 and as our Chairman of the Board of Directors since December 6, 2011 and previously served as our President from May 2007 until August 26, 2011, our Chief Executive Officer from August 2006 through August 26, 2011, and Treasurer since December 2006.  Since September 28, 2012, Mr. Caragol has also been our acting chief financial officer.  Mr. Caragol served as Steel Vault’s chief executive officer and a member of its Board of Directors during 2008 and 2009, when Steel Vault became our wholly-owned subsidiary. Previously Mr. Caragol was the Chief Financial Officer of Millivision Technologies and was a Senior Manager with Deloitte & Touche LLP. Mr. Caragol serves on the Board of Trustees of Saint Andrews School.  Mr. Caragol served as a member of the Board of Directors of Gulfstream International Group, Inc. during 2010 and on the Board of Directors of VeriTeQ Corporation until July 8, 2013.  He is a member of the American Institute of Certified Public Accountants and graduated from the Washington & Lee University with a bachelor of science in Administration and Accounting. The Board of Directors nominated Mr. Caragol as a director because of his past experience as a senior executive of other companies in the technology industry and because he holds the position of chief executive officer.

 

Jeffrey S. Cobb, 53 , has served as a member of our Board of Directors since March 2007. Since April 2004, Mr. Cobb is the chief operating officer of IT Resource Solutions.net, Inc. Mr. Cobb served as a member of the Board of Directors of Steel Vault from March 2004 through July 22, 2008. Mr. Cobb earned his bachelor of science in Marketing and Management from Jacksonville University. Mr. Cobb was nominated to the Board of Directors because of his management and business development experience in technology companies.

 

Michael E. Krawitz, 45 , has served as a member of our Board of Directors since November 2008. He currently serves as Chief Legal and Financial Officer of VeriTeQ Corporation. From November 2010 to January 2014 he served as chief executive officer and general counsel of PEAR, LLC, a company that finances renewable energy and energy efficiency projects throughout the United States. From June 2010 until February 2011, he served as chief executive officer of Florida Sunshine Investments I, Inc. He previously served as the chief executive officer and president of Digital Angel Corporation from December 2006 to December 2007, executive vice president, general counsel and secretary from March 2003 until December 2006, and as a member of its Board of Directors from July 2007 until December 2007. Mr. Krawitz served as a member on the Board of Directors of Steel Vault from July 2008 until November 2009. Mr. Krawitz earned a bachelor of arts degree from Cornell University and a juris doctorate from Harvard Law School. Mr. Krawitz was nominated to the Board of Directors due to his past experience as a chief executive officer of Digital Angel, our former parent company, as well as his experience as an attorney. 

Ned L. Siegel, 63 , has served as a member of our Board of Directors since February 2011.  He has served as President of the Siegel Group, Inc. since September 1997, and Managing Member of the Siegel Consulting Group, LLC since November 2009, which provide real estate development and realty management services.  From October 2007 until January 2009, he served as United States Ambassador to the Commonwealth of the Bahamas. Mr. Siegel was appointed Vice Chairman of Alternative Fuels Americas, Inc. in January of 2011. Mr. Siegel earned a bachelor of arts degree from the University of Connecticut in 1973 and a juris doctorate from the Dickinson School of Law in 1976.  Mr. Siegel was nominated to the Board of Directors due to his past experience with government appointments and services and his managerial experience.

 

Executive Officers

 

Our executive officers, their ages and positions, as of March 19, 2015, are set forth below:  

 

Name   Age   Position
William J. Caragol   47   Chairman of the Board, Chief Executive Officer and Acting Chief Financial Officer
Lyle L. Probst   44   President

 

A summary of the business experience of Mr. Caragol is set forth above.

 

26
 

 

Lyle L. Probst, 44 , has served as our President since April 2014 and previously served as our vice president of operations and product development from May 2011 until April 2014.  He has 15 years of management experience with large bio-detection programs and products, and joined PositiveID in 2011 at the time that PositiveID acquired Microfluidic Systems. Mr. Probst joined Microfluidic Systems in February 2007 and served as the director of project management until February 2010, and then served as the senior director of project management until April 2011.  At Microfluidic Systems, Mr. Probst managed a series of programs such as the Department of Homeland Security Science & Technology BAND (Bioagent Autonomous Networked Detector) program. Before joining Microfluidic Systems, Mr. Probst directed bio-detection programs at Lawrence Livermore National Laboratory (“LLNL”) as a biomedical scientist project manager from February 2000 until February 2007. While he was at LLNL, he was instrumental in the development and deployment of BioWatch Generation 1, and was principal investigator/developer of the high-throughput BioWatch mobile laboratory and a subject matter expert within the Biodefense Knowledge Center. Mr. Probst was previously the Director of Capillary Electrophoresis and Director of Chemistries at the Joint Genome Institute. He holds a B.S. in Biology and an M.B.A in Executive Management. 

 

Audit Committee

 

Our audit committee currently consists of Ned L. Siegel and Jeffrey S. Cobb. Mr. Siegel chairs the audit committee. Our Board has determined that each of the members of our audit committee is “independent,” as defined under, and required by, the federal securities laws and the rules of the SEC, including Rule 10A-3(b)(i) under the Securities and Exchange Act of 1934, as amended, or the Exchange Act. Although we are no longer listed on the Nasdaq Capital Market, each of the members of our audit committee is “independent” under the listing standards of the Nasdaq Capital Market. Our Board has determined that Mr. Siegel qualifies as an “audit committee financial expert” under applicable federal securities laws and regulations. A copy of the current audit committee charter is available on our website at www.positiveidcorp.com .

 

The audit committee assists our Board in its oversight of:

 

  our accounting, financial reporting processes, audits and the integrity of our financial statements;

 

  our independent auditor’s qualifications, independence and performance;

 

  our compliance with legal and regulatory requirements;

 

  our internal accounting and financial controls; and

 

  our audited financial statements and reports, and the discussion of the statements and reports with management, including any significant adjustments, management judgments and estimates, new accounting policies and disagreements with management.

 

The audit committee has the sole and direct responsibility for appointing, evaluating and retaining our independent auditors and for overseeing their work. All audit and non-audit services to be provided to us by our independent auditors must be approved in advance by our audit committee, other than de minimis non-audit services that may instead be approved in accordance with applicable rules of the SEC.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires that our officers and directors and persons who own more than 10% of our common stock file reports of ownership and changes in ownership with the SEC and furnish us with copies of all such reports. Based solely on a review of copies of such forms and written representations from our directors, executive officers and 10% owners, we believe that for the fiscal year of 2014, all of our directors, executive officers and 10% owners were in compliance with the disclosure requirements of Section 16(a).

 

Code of Business Conduct and Ethics

 

Our Board has approved and we have adopted a Code of Business Conduct and Ethics, or the Code of Conduct, which applies to all of our directors, officers and employees. Our Board has also approved and we have adopted a Code of Ethics for Senior Financial Officers, or the Code for SFO, which applies to our chief executive officer and chief financial officer. The Code of Conduct and the Code for SFO are available upon written request to PositiveID Corporation, Attention: Secretary, 1690 South Congress Avenue, Suite 201, Delray Beach, Florida 33445. The audit committee of our Board is responsible for overseeing the Code of Conduct and the Code for SFO. Our audit committee must approve any waivers of the Code of Conduct for directors and executive officers and any waivers of the Code for SFO.

 

Item 11. Executive Compensation

 

The following table sets forth information regarding compensation earned in or with respect to our fiscal year 2013 and 2014 by:

 

  each person who served as our chief executive officer in 2014; and
     
  each person who served as our chief financial officer in 2014; and
     
 

each person who served as our President in 2014.

 

27
 

 

We had no other executive officers during any part of 2014.

 

Summary Compensation Table

 

Name and
Principal Position
  Year     Salary
($)
    Bonus
($)
    Stock
Awards
($)
    Option
Awards
($)
    Non-Equity
Incentive
Plan
Compensation
($)
    All Other
Compensation
($)
    Total
($)
 
                                                 
William J. Caragol     2014       200,000 (1)     405,000 (2)     145,590 (3)                 178,774 (4)     929,364  
Chairman, Chief Executive Officer and Acting Chief Financial Officer     2013       275,000 (5)     179,400 (6)     51,250 (7)                 47,655 (8)     553,305  
Lyle Probst     2014       200,000 (9)     272,500 (10)                             427,500  
President     2013 (11)                                          

 

  (1) Represents the $200,000 salary pursuant to his amended employment contract. 
  (2) Represents the (i) grant date fair value of 500,000 shares of common stock, (ii) grant date fair value of 225 Series I shares issued as a component of Mr. Caragol’s 2014 incentive compensation and, (iii) $75,000 accrued incentive compensation for 2014.  The Series I shares were issued on January 12, 2015 and will vest on January 1, 2017.
  (3) Represents the aggregate grant date fair value, of 100,000 shares of our common stock and the grant date fair value of 143 Series I Preferred Shares granted to Mr. Caragol related to the reduction of his salary pursuant to his amended employment contract.
  (4) The amount shown includes (i) $25,000 for an expense allowance, (ii) $23,774 for an automobile lease, insurance and gasoline expenses, and (iii) grant date fair value of 100 Series I Shares issued to Mr. Caragol as tax equalization payments for previous equity awards.
  (5) Represents the $275,000 salary pursuant to Mr. Caragol’s amended employment contract.  Of this amount $214,000 was not paid in 2013, and was paid during 2014.
  (6) Represents the grant date fair value of 138 Series I Preferred Stock which was granted to Mr. Caragol as bonus compensation for 2013.
  (7) Represents the aggregate grant date fair value, of 100,000 shares of our common stock.
  (8) The amount shown includes (i) $25,000 for an expense allowance, which amount was converted to Series I Preferred Stock as part of a liability reduction plan; and (ii) $22,655 for an automobile lease, insurance and gasoline expenses.
  (9) Represents 2014 $200,000 salary; Mr. Probst was appointed President of the Company on April 16, 2014. 
  (10) Represents the (i) grant date fair value of the 366,667 shares of common stock, (ii) grant date fair value of 150 Series I shares issued as a component of Mr. Probst’s 2014 incentive compensation and, (iii) $50,000 accrued incentive compensation for 2014.  The Series I shares were issued on January 12, 2015 and will vest on January 1, 2017.
  (11) Mr. Probst was appointed as the President of the Company on April 16, 2014 therefore no compensation was disclosed for 2013.

 

Narrative Disclosure to Summary Compensation Table and Additional Narrative Disclosure

 

Executive Employment Arrangements

 

2011 Executive Employment Arrangements

 

On November 10, 2010, our Compensation Committee approved a five year employment and non-compete agreement for Mr. Caragol. Beginning in 2011, Mr. Caragol began receiving a base salary of $225,000.  His salary was set to increase a minimum of 5% per annum during each calendar year of the term.  During the term, Mr. Caragol was due to receive a minimum annual bonus for each calendar year of the term in an amount equal to a minimum of one (1) times such executive’s base salary.  Additionally, the Compensation Committee has the authority to approve a discretionary bonus for each year of the term. In 2010, Mr. Caragol received 30,000 shares of restricted stock, under the PositiveID Corporation 2009 Stock Incentive Plan. These restricted shares vested according to the following schedule: (i) 50% vest on January 1, 2012; and (ii) 50% vest on January 1, 2013. Mr. Caragol’s rights and interests in the unvested portion of the restricted stock were subject to forfeiture in the event he resigned prior to January 1, 2013 or was terminated for cause prior to January 1, 2013, with said cause being defined as a conviction of a felony or such person being prevented from providing services to us as a result of such person’s violation of any law, regulation and/or rule. Mr. Caragol is also entitled to Company-paid health insurance and disability insurance, non-allocable expenses of $25,000, and is entitled to use of an automobile leased by us and other automobile expenses, including insurance, gasoline and maintenance costs.

 

28
 

  

 If Mr. Caragol’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 five times the then current base salary and five times the average bonus paid to Mr. Caragol for the three full 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.  Upon a change of control, we must continue to pay all lease payments on the vehicle then used by executive. 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.

 

On September 30, 2011, our Compensation Committee approved a two year employment and non-compete agreement for Bryan D. Happ, our chief financial officer. Under the employment agreement, Mr. Happ was to receive a base salary of $180,000, subject to a minimum increase of 5% per annum during each calendar year of the term.  During the term, Mr. Happ was eligible to receive a discretionary bonus for each year of the term with a target incentive compensation between 50% and 100% of his base salary then being paid. Mr. Happ was also entitled to receive Company-paid health and disability insurance during the term of the employment agreement.  If Mr. Happ’s employment was terminated prior to the expiration of the term, certain payments were to become due.  The amount of such payments depended on the nature of the termination and whether the termination occurred before or after one year from the date of the employment agreement. In the event Mr. Happ was terminated without cause on or before one year from the date of the employment agreement, Mr. Happ was entitled to one times his then current base salary and any bonus paid by us within one year from the date of the employment agreement. In the event Mr. Happ was terminated without cause after one year from the date of the employment agreement, Mr. Happ was entitled to two times his then current base salary and the average bonus paid by us within the last two calendar years (or such lesser period if the employment agreement is terminated less than two years from the date of the employment agreement).

 

Amendments to 2011 Executive Employment Arrangements

 

Mr. Caragol's annual base salary was increased from $225,000 to $275,000 in connection with his appointment as our chief executive officer effective August 26, 2011.

 

On December 6, 2011, the Compensation Committee approved a First Amendment to Employment and Non-Compete Agreement, or the First Amendment, between us and William J. Caragol, our Chief Executive Officer, 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 738,916 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 500,000 shares of restricted stock over a 4 year period as follows: (i) 100,000 shares upon execution of the First Amendment, which shall vest on January 1, 2014, (ii) 100,000 shares on January 1, 2012, which shall vest on January 1, 2015, (iii) 100,000 shares on January 1, 2013, which shall vest on January 1, 2015, (iv) 100,000 shares on January 1, 2014, which shall vest on January 1, 2016, and (v) 100,000 shares on January 1, 2015, which shall vest on January 1, 2016.   We and Mr. Caragol agreed to delay the issuance of the first and second restricted share grants, for a total of 200,000 shares, until we had available shares under one of our stock incentive plans. The restricted shares were granted on October 4, 2012. Upon a change in control or in the event that Mr. Caragol terminates his employment for “constructive termination” (as such term is defined his employment agreement) or in the event we terminate his employment without cause, the restricted stock described above shall be issued within five (5) business days of such triggering event and all of the restricted stock shall vest immediately. If Mr. Caragol resigns, is terminated for cause, or his employment is terminated due to his death or disability, Mr. Caragol will forfeit the restricted shares discussed above.

 

On September 28, 2012, the employment of Bryan D. Happ, our Chief Financial Officer terminated. In connection with the termination of Happ’s Employment and Non-Compete Agreement dated September 30, 2011, we and Mr. Happ entered into a Separation Agreement and General Release, or the Separation Agreement, on September 28, 2012. Pursuant to the Separation Agreement, Mr. Happ is due to receive payments totaling $404,423, or the Compensation, consisting of past-due accrued and unpaid salary and bonus amounts plus termination compensation. Of the Compensation, $100,000 was paid with 200,000 shares of our restricted common stock (such shares not issued under a stockholder approved plan) and $304,423 will be paid in cash. As of December 31, 2014, we have paid $166,880 of the cash balance to Mr. Happ.

 

Also effective September 28, 2012, we appointed William J. Caragol, our Chairman and Chief Executive Officer, as our acting Chief Financial Officer.

 

On January 14, 2014 the Company and Mr. Caragol agreed to amend his employment contract and reduce his annual salary from the remainder of its term to $200,000, per annum, in exchange for 143 shares of Series I Preferred Stock, with a face value of $143,000. The Company also granted Mr. Caragol 100 shares of Series I Preferred Stock as a tax equalization payment to compensate Mr. Caragol for taxes paid on unrealized stock compensation during past years.

 

29
 

   

Outstanding Equity Awards as Of December 31, 2014

 

The following table provides information as of December 31, 2014 regarding unexercised stock options and restricted stock outstanding held by Messrs. Caragol and Probst:

 

Outstanding Equity Awards as of December 31, 2014

 

    Option Awards   Stock Awards  
Name   Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
    Number of
Securities
Underlying
Unexercised
Options(#)
Unexercisable
    Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
    Option
Exercise
Price
($)
    Option
Expiration
Date
  Number
of Shares
or Units
of Stock
That
Have Not
Vested
(#)
    Market
Value
of

Shares
or

Units of
Stock
That

Have
Not

Vested
($)
    Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)
    Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
($)
 
William J. Caragol                               1,938,916 (1)   $ 57,974 (3)            
                                            100,000 (2)   $ 2,990 (3)
Lyle Probst     3,000                 $ 9.25     5/23/2021                        
      1,000                 $ 5.75     8/31/2021                        
      1,000                 $ 5.75     8/31/2022                        
      20,000                 $ 1.00     6/06/2022                        
                                611,298 (4)   $ 18,278 (3)            

 

(1) Mr. Caragol owns, as of December 31, 2014, an aggregate of 1,938,916 unvested shares of common stock which will vest as follows: (i) 100,000 shares of common stock will vest on January 1, 2015, and (ii) 1,838,916 will vest on January 1, 2016.
(2) Pursuant to Mr. Caragol’s employment agreements we are obligated to grant to Mr. Caragol an aggregate of 500,000 shares of restricted stock over a 4 year period as follows: (i) 100,000 shares upon execution of the agreement, which shall vest on January 1, 2014, (ii) 100,000 shares on January 1, 2012, which shall vest on January 1, 2015, (iii) 100,000 shares on January 1, 2013, which shall vest on January 1, 2015, (iv) 100,000 shares on January 1, 2014, which shall vest on January 1, 2016, and (v) 100,000 shares on January 1, 2015, which shall vest on January 1, 2016. Upon a change in control or in the event that Mr. Caragol terminates his employment for “constructive termination” (as such term is defined his employment agreement) or in the event we terminate his employment without cause, the restricted stock described above shall be issued within five (5) business days of such triggering event and all of the restricted stock shall vest immediately. If Mr. Caragol resigns, is terminated for cause, or his employment is terminated due to his death or disability, Mr. Caragol will forfeit the restricted shares discussed above.
(3) Computed by multiplying the closing market price of a share of our common stock on December 31, 2014, or $0.0299, by the number of shares of common stock that have not vested.
(4) Mr. Probst was granted 244,631 of restricted stock on January 8, 2013 and 366,667 of restricted stock on April 16, 2014 as employee incentive compensation for 2012 and 2014, respectively. These restricted shares will vest on January 1, 2016.

 

Director Compensation

 

The following table provides compensation information for persons serving as members of our Board of Directors during 2014:

 

30
 

 

2014 Director Compensation

 

Name   Fees
Earned
or Paid
in Cash
($)(1)
    Stock
Awards
($)
    Option
Awards
($)
    Non-Equity
Incentive Plan
Compensation
($)
    Nonqualified
Deferred
Compensation
Earnings
    All Other
Compensation
($)(2)
    Total
($)
 
Jeffrey S. Cobb     20,000                               32,500       52,500  
Michael E. Krawitz     20,000                               32,500       52,500  
Ned L. Siegel     20,000                               32,500       52,500  

  

  (1) These fees are comprised of $5,000 per quarter, per director
  (2) Represent the grant date fair value of the Series I Convertible Preferred Shares were granted as 2014 Board of Directors compensation pursuant to a Restricted Stock Award Agreement dated December 31, 2013. Each non-executive board member was granted 25 Series I Preferred Shares on December 31, 2013, which vest on January 1, 2016 . Additionally, on January 12, 2015, each non-executive member was granted 50 shares of Series I convertible preferred stock, which vest on January 1, 2017. These grants were components of 2015 director’s compensation, and as such these amounts have not been included in 2014 Director Compensation.    

 

On December 31, 2013, the Board of Directors approved the 2014 Board Compensation Plan, effective January 1, 2014, where each director receives a quarterly compensation of $5,000.

 

The Series I preferred shares that were issued to the independent board of directors as of March 19, 2015 is detailed as follows:

 

Name   Position   Preferred
Series I
Issued
    Common
Shares
Issuable
Upon
Conversion
    Total
Votes
 
Michael E. Krawitz   Director     126      

4,486,934

     

112,173,351

 
Jeffrey S. Cobb   Director     113       4,094,065       102,351,624  
Ned L. Siegel   Director     89       3,368,768       84,219,203  
Total         328       11,949,767       298,744,178  

 

Item 12. Security Ownership of Certain Beneficial Owners And Management

  

The following table sets forth certain information known to us regarding beneficial ownership of shares of our common stock as of March 19, 2015 by:  

 

  each of our directors;
  each of our named executive officers;
  all of our executive officers and directors as a group; and
  each person, or group of affiliated persons, known to us to be the beneficial owner of more than 5% of our outstanding shares of common stock.

 

Beneficial ownership is determined in accordance with the rules and regulations of the SEC and includes voting and investment power with respect to the securities. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of March 19, 2015 are deemed outstanding. Such shares, however, are not deemed outstanding for purposes of computing the percentage ownership of any other person. To our knowledge, except as indicated in the footnotes to this table and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of our common stock shown opposite such person’s name. The percentage of beneficial ownership is based on 221,441,067 shares of our common stock outstanding as of March 19, 2015. Unless otherwise noted below, the address of the persons and entities listed in the table is c/o PositiveID Corporation, 1690 South Congress Avenue, Suite 201, Delray Beach, Florida 33445. As a result the Company’s issuance of 1,474 shares of Series I Preferred Stock to named executive officers and directors, they have the voting right to 1.39 billion votes as the result of their Series I holdings. The percentage of voting rights in the table below assumes that all Series I shares held by directors and named officers are voted in any instance requiring shareholder vote.  

 

The beneficial owners of all issued shares have voting rights over such shares, whether or not such owners have dispositive powers with respect to the shares, and such shares are included in each person’s beneficial ownership amount. For the avoidance of doubt, if a beneficial owner does not have dispositive powers with respect to certain shares, each such person maintains voting control over these shares, and such shares are included in the determination the person’s beneficial ownership amount.

 

31
 

 

Name and Address of Beneficial Owner   Number of
Shares
Beneficially
Owned (#)
    Percent of
Outstanding
Shares (%)
    Percent of
Voting Rights
(%)
 
Five Percent Stockholders:                        
William J. Caragol (1)     34,882,632       13.7 %     46.5 %
                         
Named Executive Officers and Directors:                        
William J. Caragol (1)     34,882,632       13.7 %     46.5 %
Lyle L. Probst (2)     11,833,167       5.1 %     16.0 %
Jeffrey S. Cobb (3)     4,706,615       2.1 %     5.9 %
Michael E. Krawitz (4)     5,145,734       2.3 %     6.4 %
Ned L. Siegel (5)     4,035,844       1.8 %     4.8 %
Executive Officers and Directors as a group (5 persons)(6)     60,603,992       21.9 %     79.6 %

 

(1)

Mr. Caragol beneficially owns 34,882,632 shares which include 2,251,916 shares of common stock directly owned by Mr. Caragol.

Mr. Caragol has sole voting power over 1,751,916 shares of our common stock. Mr. Caragol has sole dispositive power over 913,000 shares of our common stock. Mr. Caragol lacks dispositive power over 1,338,916 shares which are restricted as to transfer until January 1, 2016. Mr. Caragol owns 856 shares of Series I preferred stock, which may convert to 32,630,716 shares of common stock. The Series I preferred stock vests on January 1, 2017.  

(2) Includes 611,298 shares of our common stock and 25,000 shares of our common stock issuable upon the exercise of stock options that are currently exercisable or exercisable within 60 days of March 19, 2015. Mr. Probst lacks dispositive power over 244,631 shares, which are restricted until January 1, 2016. Mr. Probst owns 290 shares of Series I preferred stock, which may convert to 11,196,869 shares of common stock. The Series I preferred stock vests on January 1, 2017.  
(3) Includes 574,800 shares of our common stock and 37,750 shares of our common stock issuable upon the exercise of stock options that are currently exercisable or exercisable within 60 days of March 19, 2015. Mr. Cobb lacks dispositive power over 60,000 shares, which are restricted until January 1, 2016. Mr. Cobb owns 113 shares of Series I preferred stock, which may convert to 4,094,065 shares of common stock. The Series I preferred stock vests on January 1, 2017.  
(4) Includes 622,800 shares of our common stock and 36,000 shares of our common stock issuable upon the exercise of stock options that are currently exercisable or exercisable within 60 days of March 19, 2015. Mr. Krawitz lacks dispositive power over 100,000 shares, which are restricted until January 1, 2016. Mr. Krawitz owns 126 shares of Series I preferred stock, which may convert to 4,486,934 shares of common stock. The Series I preferred stock vests on January 1, 2017. 
(5) Includes 631,076 shares of our common stock and 36,000 shares of our common stock issuable upon the exercise of stock options that are currently exercisable or exercisable within 60 days of March 19, 2015. Mr. Siegel lacks dispositive power over 120,000 shares, which are restricted until January 1, 2016. Mr. Siegel owns 89 shares of Series I preferred stock, which may convert to 3,368,768 shares of common stock. The Series I preferred stock vests on January 1, 2017. 
(6) Includes shares of our common stock beneficially owned by current executive officers and directors and shares issuable upon the exercise of stock options that are currently exercisable or exercisable within 60 days of March 19, 2015, in each case as set forth in the footnotes to this table.  

 

  Equity Compensation Plan Information

 

The following table presents information regarding options and rights outstanding under equity our compensation plans as of December 31, 2014:

 

Plan Category(1)   (a)
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
    (b)
Weighted-
average
exercise price
per share of
outstanding
options,
warrants and
rights
    (c)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))
 
                   
Equity compensation plans approved by security holders     406,288     $ 0.11       1,179,766  
Equity compensation plans not approved by security holders(2)     2,450,000     $ 31.84        
Total     2,856,288     $ 0.79       1,179,766  

 

32
 

 

  (1) A narrative description of the material terms of our equity compensation plans is set forth in Note 7 to our consolidated financial statements for the year ended December 31, 2014.

  (2) We have made grants outside of our equity plans and have outstanding warrants exercisable for 4,490,000 shares of our common stock. These warrants were granted as compensation for financing transactions or for the rendering of consulting services.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence  

 

Since the beginning of our fiscal year 2013, there has not been, and there is not currently proposed any transaction or series of similar transactions in which the amount involved exceeded or will exceed the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years and in which any related person, including any director, executive officer, holder of more than 5% of our capital stock during such period, or entities affiliated with them, had a material interest, other than as described in the transactions set forth below.

 

Related Party Transactions

 

VeriTeQ Transaction

 

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

 

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

 

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

 

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

 

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

 

33
 

 

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

 

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

 

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

 

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

 

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

 

Pursuant to the SPA, the Company sold its remaining shares of VeriTeQ common stock (871,754) and the convertible note owed from VeriTeQ to the Company (convertible into 135,793 shares of VeriTeQ common stock). Total proceeds from the sale were $750,000, which were received by November 18, 2013. On November 13, 2013, the aggregate market value of the 871,754 shares of VeriTeQ common stock was $1.8 million, and the aggregate market value of 135,793 shares of Common Stock underlying the promissory note was $276,000. On the one year anniversary of the transaction, or November 13, 2014, the shares and share equivalents sold to the Buyers would have had a combined value of approximately $3,000.

 

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

 

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

 

34
 

 

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

 

Pursuant to the agreement, the Company also agreed to provide financial support to VeriTeQ, for a period of up to two years, in the form of convertible promissory notes. On October 20, 2014, the Company funded VeriTeQ $60,000 and VeriTeQ issued the Company a Convertible Promissory Note (“Note II”) in the principal amount of $60,000. Note II bears interest at the rate of 10% per annum; is due and payable on October 20, 2015; and may be converted by the Company at any time after 190 days of the date of closing into shares of VeriTeQ common stock at a conversion price equal to a 40% discount of the average of the three lowest daily trading prices (as set forth in Note II) calculated at the time of conversion. Note II also contains certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under Note II in the event of such defaults. On January 30, 2015 the Company funded an additional $40,000 in the form of a promissory note with the same terms and conditions as Note II.

 

Issuance of Series I Convertible Preferred Stock Resulting in Management’s Voting Control of the Company  

 

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

  

Subject to the Plan $590,000 of accrued compensation was settled through the commitment to transfer 327,778 shares of VeriTeQ common stock (out of the 1,199,532 total shares of VeriTeQ common stock that are issuable to the Company upon the conversion of VeriTeQ’s Series C convertible preferred stock owned by the Company). The Series C conversion was completed on October 22, 2013. The VeriTeQ shares were valued at $1.80 (adjusted to reflect the 1 for 30 reverse split by VeriTeQ on October 22, 2013), which was a 21% discount to the closing bid price on September 30, 2013, to reflect liquidity discount and holding period restrictions. The closing bid price on the day of conversion was $2.28; on December 31, 2014 the closing bid price was $0.0016.  

  

Six members of Management participated in this conversion, including all four of the Company’s current board of directors and one of its former directors. The former director, Mr. Edelstein, resigned from our Board on July 8, 2013 to join VeriTeQ's Board. The board and Management participated as follows:  

  

Name   Position   Total
Liability 
Converted($)
    VeriTeQ 
Shares 
Transferred
    Value of
VeriTeQ
Shares at 
September
30 ,2013
    Value of
VeriTeQ
Shares at 
December 31,
2014
 
William J. Caragol   Chairman and Chief Executive Officer   $ 10,000       5,556     $ 12,667     $ 9  
Michael E. Krawitz   Director     285,500       158,611       361,633       254  
Jeffrey S. Cobb   Director     75,000       41,667       95,000       67  
Barry Edelstein   Former Director     109,500       60,833       138,700       97  
Ned L. Siegel   Director     100,000       55,556       126,667       89  
Allison F. Tomek   SVP of Corporate Development     10,000       5,556       12,667       9  
Total       $ 590,000       327,779     $ 747,334     $ 525  

 

Subject to the Plan 413 shares of Series I Preferred Stock were issued in settlement of $413,000 of accrued compensation. The conversion price of the Series I shares was fixed at $0.036, which was the closing bid price on the day of conversion. The Series I preferred shares were issued to six members of the Company’s Management, including all four members of the current board of directors. The directors’ and management participation as of September 30, 2013 is detailed as follows:  

  

Name   Position   Total
Liability 
Converted($)
    Preferred 
Series I 
Issued
    Common 
Shares 
Issuable 
Upon 
Conversion
    Total 
Votes
 
William J. Caragol   Chairman and Chief Executive Officer   $ 250,000       250       6,944,444       173,611,100  
Michael E. Krawitz   Director     51,000       51       1,416,667       35,416,675  
Jeffrey S. Cobb   Director     38,000       38       1,055,556       26,388,900  
Ned L. Siegel   Director     14,000       14       388,889       9,722,225  
Lyle Probst   President     40,000       40       1,111,111       27,777,775  
Allison F. Tomek   SVP of Corporate Development     20,000       20       555,556       13,888,900  
Total       $ 413,000       413       11,472,223       286,805,575  

 

35
 

 

In granting these shares to directors and management the Board considered a number of factors, including the current market rates at which financing is available to early stage companies. It has been the Company’s experience that debt and equity financing for the Company in current market conditions was typically being priced at total discounts to market well in excess of 50%. The Board and management did not wish to receive any discount for the conversion of $413,000 of liabilities, but did seek to have a voting preference that was commensurate with the risk and more importantly continued commitment of the Board and management to the Company. The shares were therefore issued at the closing bid price the day of issuance (subject to signed exchange agreements with each participant), and at a dollar for dollar exchange ($1,000 of liability settled for 1 preferred share).     

 

Additionally, on December 31, 2013 the three independent directors were each granted 25 shares of Series I Preferred Stock, as a component of their 2014 board compensation. On January 14, 2014, an additional 512 shares of Series I Preferred Stock were issued to the Company’s CEO, President and Senior Vice President. Of these shares 381 were issued to the Company’s chief executive officer as follows: (i) 138 shares issued for 2013 incentive compensation in lieu of cash, (ii) 143 shares were issued for his agreement to amend his employment contract and reduce his annual salary from the remainder of the term of the contract to $200,000, per annum, and (iii) 100 shares of Series I as a tax equalization payment to compensate Mr. Caragol for taxes paid on unrealized stock compensation during prior years. All Series I shares granted vest on January 1, 2017. On January 12, 2015 an additional 625 shares of Series I was issued to management and board members for 2014 incentive compensation and 2015 director compensation.

 

The Series I Preferred Stock has voting rights equivalent to twenty five votes per common share equivalent. As a result, the Company’s officers and directors had an effective voting control of 80%, as of March 19, 2015. Additionally, William J. Caragol, our Chief Executive Officer and Chairman of the Board has majority control with 46.5% voting control as of March 19, 2015. As a result, our officers, directors, and management have voting control over the 1,758,491,438 million of the outstanding voting shares of the Company. There exists an inherent conflict of interest in the board approval of the issuance of Series I Preferred Stock to officers and directors of the Company, which granted themselves voting control over the Company.

 

Caragol Note

 

On September 7, 2012, we issued a Secured Promissory Note, or the Caragol Note, in the principal amount of $200,000 to William J. Caragol, or Caragol, our chairman and chief executive officer, in connection with a $200,000 loan to us by Caragol. The Caragol Note accrues interest at a rate of 5% per annum, and principal and interest on the Caragol Note were due and payable on September 6, 2013. We agreed to accelerate the repayment of principal and interest in the event that we raise 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 our assets of pursuant to a Security Agreement between us and Caragol dated September 7, 2012, or 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 our insolvency, bankruptcy, or dissolution. During 2012, the Company paid $100,000 of the principal amount of the Caragol Note and all accrued interest owed on the date of payment on December 18, 2012. Additionally, we and Caragol terminated the Caragol Security Agreement effective January 16, 2013. As of December 31, 2014, the outstanding principal and interest on the Caragol Note was $110,322.  

 

Review, Approval or Ratification of Transactions with Related Parties

 

Our audit committee’s charter requires review and discussion of any transactions or courses of dealing with parties related to us that are significant in size or involve terms or other aspects that differ from those that would be negotiated with independent parties. Our nominating and governance committee’s charter requires review of any proposed related party transactions, conflicts of interest and any other transactions for which independent review is necessary or desirable to achieve the highest standards of corporate governance. It is also our unwritten policy, which policy is not otherwise evidenced, for any related party transaction that involves more than a de minimis obligation, expense or payment, to obtain approval by our Board of Directors prior to our entering into any such transaction. In conformity with our various policies on related party transactions, each of the above transactions discussed in this “Certain Relationships and Related Transactions” section has been reviewed and approved by our Board of Directors.

 

Director Independence

 

Our Board of Directors currently consists of four members: William J. Caragol, Jeffrey S. Cobb, Michael E. Krawitz and Ned L. Siegel. Although we are no longer listed on the Nasdaq Capital Market, our Board has determined that three of our four directors, Messrs. Cobb, Krawitz and Siegel, are independent under the standards of the Nasdaq Capital Market. Mr. Caragol, who is our Chief Executive Officer and acting Chief Financial Officer is not considered independent.   

 

For transactions, relationships or arrangements that were considered by the Board in determining whether each director was independent, please see “Certain Relationships and Related Transactions — Director and Officer Roles and Relationships” above.

 

Item 14. Principal Accountant Fees and Services

 

For the fiscal years ended December 31, 2014 and 2013, fees for audit and audit related services were as follows:

 

36
 

 

      2014 (2)     2014(1)     2013 (1)  
                           
Audit Fees   $ 59,000     $ 27,000     $ 137,000    
Audit Related Fees           7,500       48,000    
All Other Fees                    
Total Fees   $ 59,000     $ 34,500     $ 185,000    

 

(1) Audit related fees for 2013 and 2014 include review of registration statements and other SEC filings. Audit and audit related services were provided by EisnerAmper LLP. Audit fees in 2014 relate to the review of the March 31, 2014 interim financial statements conducted by EisnerAmper LLP.

 

(2) Audit fees in 2014 provided by Salberg and Company P.A. relates to the 2014 fiscal year end audit and June 30, 2014 and September 30, 2014 interim reviews.

 

Pre-Approval Policies and Procedures

 

The audit committee has a policy for the pre-approval of all auditing services and any provision by the independent auditors of any non-audit services the provision of which is not prohibited by the Exchange Act or the rules of the SEC under the Exchange Act. Unless a type of service to be provided by the independent auditor has received general pre-approval, it will require specific pre-approval by the audit committee, if it is to be provided by the independent auditor. All fees for independent auditor services will require specific pre-approval by the audit committee. Any fees for pre-approved services exceeding the pre-approved amount will require specific pre-approval by the audit committee. The audit committee will consider whether such services are consistent with the SEC’s rules on auditor independence.

  

All services provided by and all fees paid to EisnerAmper LLP and Salberg & Company, P.A. in fiscal 2014 and 2013 were pre-approved by our audit committee, in accordance with its policy. None of the services described above were approved pursuant to the exception provided in Rule 2-01(c)(7)(i)(C) of Regulations S-X promulgated by the SEC.

   

37
 

  

PART IV

 

Item 15. Exhibits, Financial Statement Schedules

 

The following documents are filed as a part of this Annual Report on Form 10-K:

 

(a)(1)   List of Financial Statements Filed as Part of this Annual Report on Form 10-K:
     
    A list of the consolidated financial statements, notes to consolidated financial statements, and accompanying report of independent registered public accounting firm appears on page F-1 of the Index to Consolidated Financial Statements and Financial Statement Schedules, which is filed as part of this Annual Report on Form 10-K.
     
(a)(2)   Financial Statement Schedules:
     
    All other schedules are omitted because they are not applicable, the amounts are not significant, or the required information is shown in our consolidated financial statements or the notes thereto.
     
(a)(3)   Exhibits:
     
    See the Exhibit Index filed as part of this Annual Report on Form 10-K.

  

38
 

  

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  POSITIVEID CORPORATION
     
Date: March 30, 2015 By:   /s/ William J. Caragol  
    William J. Caragol
    Chief Executive Officer and Acting Chief Financial Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ William J. Caragol   Chief Executive Officer, Chairman   March 30, 2015
William J. Caragol  

of the Board and Acting

Chief Financial Officer

(Principal Executive Officer and Principal Financial Officer)

   
         
/s/ Jeffrey S. Cobb   Director   March 30, 2015
Jeffrey S. Cobb        
         
/s/ Michael E. Krawitz   Director   March 30, 2015
Michael E. Krawitz        
         
/s/ Ned L. Siegel   Director   March 30, 2015
Ned L. Siegel        

 

39
 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Reports of Independent Registered Public Accounting Firms F-2
   
Consolidated Balance Sheets as of December 31, 2014 and 2013 F-4
   
Consolidated Statements of Operations for the years ended December 31, 2014 and 2013 F-5
   
Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2014 and 2013 F-6
   
Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013 F-7
   
Notes to Consolidated Financial Statements F-8

 

F- 1
 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of:

 

PositiveID Corporation,

 

We have audited the accompanying consolidated balance sheet of PositiveID Corporation and its Subsidiaries as of December 31, 2014 and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audit. 

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PositiveID Corporation and its Subsidiaries as of December 31, 2014 and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

 The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company reported a net loss, and used cash for operating activities of approximately $8,606,000 and $2,569,000 respectively, in 2014. At December 31, 2014, the Company had a working capital deficiency, stockholders’ deficit and accumulated deficit of approximately $8,076,000, $8,446,000 and $132,757,000 respectively. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans as to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

SALBERG & COMPANY, P.A.

Boca Raton, Florida

March 30, 2015

  

2295 NW Corporate Blvd., Suite 240 • Boca Raton, FL 33431-7328

Phone: (561) 995-8270 • Toll Free: (866) CPA-8500 • Fax: (561) 995-1920

www.salbergco.com • info@salbergco.com

Member National Association of Certified Valuation Analysts • Registered with the PCAOB

Member CPAConnect with Affiliated Offices Worldwide • Member AICPA Center for Audit Quality

 

F- 2
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders

PositiveID Corporation

 

We have audited the accompanying consolidated balance sheet of PositiveID Corporation (the “Company”) as of December 31, 2013, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the year ended December 31, 2013. The consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Positive ID Corporation as of December 31, 2013, and the consolidated results of its operations and its cash flows for the year ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, at December 31, 2013 the Company has a working capital deficiency and an accumulated deficit. Additionally, the Company has incurred operating losses since its inception and expects operating losses to continue during 2014. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ EisnerAmper LLP

 

New York, NY

April 11, 2014

 

F- 3
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data)

 

    December 31,
2014
    December 31,
2013
 
             
Assets                
Current Assets:                
Cash and cash equivalents   $ 145     $ 165  
Prepaid expenses and other current assets     5       81  
Total Current Assets     150       246  
                 
Equipment, net     3       11  
Goodwill     510       510  
Intangibles, net     347       623  
Other assets     11       11  
Total Assets   $ 1,021     $ 1,401  
                 
Liabilities and Stockholders’ Deficit                
Current Liabilities:                
Accounts payable   $ 127     $ 498  
Deferred revenue     2,571       2,500  
Accrued expenses and other current liabilities     693       658  
Short-term convertible debt, net of discounts and premiums     1,527       460  
Notes payable, net of discounts     676       696  
Embedded conversion option liability     2,152        
Tax contingency     480       500  
Contingent earn-out liability           514  
Total Current Liabilities     8,226       5,826  
                 
 Long Term Liabilities:                
Mandatorily  redeemable preferred stock, 2,500 shares authorized; $0.001 par value; Series I Preferred – 1,000 and 488 shares issued and outstanding at December 31, 2014 and 2013, respectively; liquidation preference and redemption value of $1,065 and $494 at December 31, 2014 and 2013, respectively.     1,241       488  
Total Liabilities     9,467       6,314  
                 
Commitments and contingencies (Note 9)                
                 
Stockholders’ Deficit:                
Convertible preferred stock, 5,000,000 shares authorized, $.001 par value; Series F Preferred – nil and 600 shares issued and outstanding at December 31, 2014 and 2013, respectively; liquidation preference of nil and $615, at December 31, 2014 and 2013, respectively            
Common stock, 970,000,000 shares authorized, $.01 par value; 169,531,322 and 45,425,186  shares issued and outstanding at December 31, 2014 and 2013, respectively     1,695       454  
Additional paid-in capital     122,616       119,256  
Accumulated deficit     (132,757 )     (124,623 )
Total Stockholders’ Deficit     (8,446 )     (4,913 )
Total Liabilities and Stockholders’ Deficit   $ 1,021     $ 1,401  

 

See accompanying notes to consolidated financial statements.

 

F- 4
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except per share data)

 

    Year Ended
December 31,
 
    2014     2013  
             
Revenue   $ 945     $  
                 
Operating expenses:                
Direct labor     294        
Selling, general and administrative     4,313       4,263  
Research and development     588       691  
Total operating expenses     5,195       4,954  
                 
Operating loss     (4,250 )     (4,954 )
                 
Other income (expense)                
Interest expense     (3,010 )     (646 )
Change in contingent earn-out liability     514       131  
Change in fair value of embedded conversion option liability     (198 )      
Loss on extinguishment of debt     (246 )      
Other income (expense)     (1 )     1,511  
Total other income (expense)     (2,941 )     996  
                 
Net loss before income tax provision     (7,191 )     (3,958 )
                 
Income tax expense           (371 )
Net loss     (7,191 )     (4,329 )
                 
Preferred stock dividends     (89 )     (42 )
Beneficial conversion dividend on preferred stock     (943 )     (8,965 )
Net loss attributable to common stockholders   $ (8,223 )   $ (13,336 )
                 
Net loss per common share attributable to common stockholders – basic and diluted   $ (0.09 )   $ (0.71 )
Weighted average shares outstanding – basic and diluted     96,602       18,746  

 

See accompanying notes to consolidated financial statements.

 

F- 5
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Deficit

For the Years Ended December 31, 2014 and 2013

(In thousands)

 

    Series F Preferred Shares     Common Shares     Additional
Paid-in
     Accumulated     Note Receivable
for Shares
    Total
Stockholders’
 
    Shares     Amount     Shares     Amount     Capital     Deficit     Issued     Deficit  
                                                 
Balance at at December 31, 2012     776     $       9,541     $ 2,385     $ 105,448     $ (111,329 )   $ (264 )   $ (3,760 )
Net loss                                   (4,329 )           (4,329 )
Stock based compensation                 5,458       55       1,125                   1,180  
Conversion of Series F Preferred shares and repayment of note receivable     (776 )           12,750       127       (6 )           264       385  
Issuance of Series F Preferred shares, net of costs     600                         300                   300  
Beneficial conversion dividends for Series F Preferred conversion                             8,965       (8,965 )            
Common stock issued pursuant to equity line agreement           ——       4,716       48       452                   500  
Common Stock issued pursuant to convertible note conversions                 8,934       89       275                   364  
Beneficial conversion feature and issuance of warrants related to financing agreements                             19                   19  
Cost of debt related to Debenture Agreement                   244       2       101                   103  
Common Stock issued pursuant to debt to equity settlement including discount on shares                 3,638       36       270                   306  
Costs related to equity line agreement                 144       2       (14 )                 (12 )
Debt discount pursuant to securities purchase agreements                             73                   73  
Preferred stock dividends                             (42 )                 (42 )
Reverse stock-split adjustment                       (2,290 )     2,290                    
Balance at December 31, 2013     600     $       45,425     $ 454     $ 119,256     $ (124,623 )   $     $ (4,913 )
                                                                 
Net loss                                   (7,191 )           (7,191 )
Stock based compensation                 9,330       93       844                   937  
Issuance of Series F Preferred shares, net of costs     450                         350                   350  
Conversion of Series F Preferred shares and accrued dividends payable     (1,050 )           44,084       441       (396 )                 45  
Beneficial conversion dividends for Series F Preferred conversion                             943       (943 )            
Common Stock issued pursuant to convertible note conversions                 62,161       622       772                   1, 394  
Relative fair-value of warrant issued with debt                             70                   70  
Reclassification of premium upon debt conversion and redemption                             722                   722  
Reclassification of derivative liability upon debt conversion                             207                   207  
Cashless exercise of warrants issued related to financing agreements                 8,531       85       (85 )                  
Reclassification of warrant liability upon conversion of warrants                             22                   22  
Preferred stock dividends                             (89 )                 (89 )
Balance at December 31, 2014         $       169,532     $ 1,695     $ 122,616     $ (132,757 )   $     $ (8,446 )

 

See accompanying notes to consolidated financial statements.

 

F- 6
 

   

POSITIVEID CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

 

    Year Ended
December 31,
 
    2014     2013  
             
Cash flows from operating activities:                
Net loss   $ (7,191 )   $ (4,329 )
                 
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     288       372  
Stock-based compensation     1,701       1,180  
Allowance on note receivable     60        
Series F preferred stock issued as penalty fee     250        
Loss on extinguishment of debt     246        
Convertible debt discounts and premium amortization     2,719       485  
Discount on liability settlement           92  
Relative value of warrants and fair-value adjustments           (147 )
Gain on sale of marketable securities           (781 )
Non-cash interest expense and financing costs           55  
Change in fair value of embedded conversion option liability     198        
Decrease in fair value of contingent earn-out liability     (514 )     (131 )
Changes in operating assets and liabilities:                
Increase (decrease) in prepaid expenses and other current assets     (76 )     115  
Decrease in accounts payable and accrued expenses     (321 )     (522 )
Increase in deferred revenue     71       1,500  
Net cash used in operating activities     (2,569 )     (2,111 )
Cash flows from investing activities:                
Purchase of equipment     (5 )     (3 )
Proceeds from sale of VeriTeQ common stock and note           781  
Net cash provided by (used) investing activities     (5 )     778  
Cash flows from financing activities:                
Proceeds from issuances of Series F Preferred Stock, net of fees     100       1,051  
Proceeds from convertible debt financing, net of fees     2,582       790  
Principal payments of short-term debt     (128 )     (454 )
Net cash provided by financing activities     2,554       1,387  
Net increase (decrease) in cash and cash equivalents     (20 )     54  
Cash and cash equivalents, beginning of year     165       111  
Cash and cash equivalents, end of year   $ 145     $ 165  
Supplementary Cash Flow Information:                
Cash paid for interest   $     $  
Cash paid for income taxes   $     $  
                 
Non-cash financing and investing activities:                
Preferred dividends converted into common stock   $ 45     $ 53  
Conversion of promissory notes into common stock   $ 1,394     $ 383  
Issuance of shares for commitment fees   $     $ 13  
Relative fair value of warrants issued with debt   $ 70     $  
Reclassification of embedded conversion option liability upon conversion of debt   $ 207     $  
Reclassification of warrant liability upon exercise of warrants   $ 22     $  
Issuance of shares for fee   $ 409     $ 141  
Issuance of warrants for advisory services   $     $ 56  

Embedded conversion option liability recorded as debt discount

  $ 2,161     $  
Payment of accrued compensation payable through issuance of:            
Common Stock   $     $ 388  
Series I Preferred Shares   $     $ 413  
Settlement of compensation with exchange of marketable securities   $     $ 590  

 

See accompanying notes to consolidated financial statements.

 

 

F- 7
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financials

December 31, 2014 and 2013

 

1.   Organization

 

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

 

PositiveID is a Delaware corporation formed in 2001. The Company commenced operations in 2002 as VeriChip Corporation. In 2007, the Company completed an initial public offering of its common stock.

 

Authorized Common Stock (Reverse Stock Split)

 

As of December 31, 2014, the Company was authorized to issue 970 million shares of common stock.  On April 18, 2013, our stockholders approved a reverse stock split within a range of between 1-for-10 to 1-for-25. On that same date our Board of Directors approved a reverse stock split in the ratio of 1-for-25 and we filed a Certificate of Amendment to our Second Amended and Restated Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware to affect the reverse stock split. On April 23, 2013, the reverse stock split became effective. All share and per share amounts in this Annual Report have been adjusted to reflect the 1-for 25 reverse stock split.

 

Going Concern

 

The Company’s consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of December 31, 2014, we had a working capital deficiency of approximately $8.1 million and an accumulated deficit of approximately $132.8 million, compared to a working capital deficit of approximately $5.6 million and an accumulated deficit of approximately $124.6 million as of December 31, 2013. The decrease in working capital was primarily due to operating losses in 2014, offset by cash received from an agreement, in a form of a purchase order, from with UTC Aerospace Systems to support a contract for the DoD (“UTAS Agreement”), and capital raised through preferred stock and convertible debt financings.

 

We have incurred operating losses prior to and since the merger that created PositiveID. The current 2014 operating losses are the result of research and development expenditures, selling, general and administrative expenses related to our molecular diagnostics and detection products.  We expect our operating losses to continue through 2015. These conditions raise substantial doubt about our ability to continue as a going concern.

 

Our ability to continue as a going concern is dependent upon our ability to obtain financing to fund the continued development of our products and to support working capital requirements. Until we are able to achieve operating profits, we will continue to seek to access the capital markets.  In 2013 and 2014, we raised approximately $1.8 and $2.7 million, respectively from the issuance of convertible preferred stock and convertible debt. In addition, we received $1.5 under the Boeing License in 2013 and $1.0 million in 2014 under the UTAS Agreement.    

 

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.

 

Concentrations

 

Concentration of Deferred Revenue

 

At December 31, 2014 and 2013, customers that each accounted for more than 10% of our deferred revenue were as follows:

 

  2014 2013
Customer 1 97% 100%

 

Concentration of Revenues

 

For the years ended December 31, 2014 and 2013, customers that each represented more than 10% of our revenues were as follows:

 

  2014 2013
Customer 2 99% -

 

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 MFS. All significant intercompany 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 allowance for doubtful accounts receivable, valuation of goodwill and intangible assets, valuation of derivatives, valuation of beneficial conversion features, estimate of the contingent earn-out liability, valuation of stock-based compensation and an estimate of the deferred tax asset valuation allowance.

 

F- 8
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financials

December 31, 2014 and 2013

 

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, 2014 or 2013 respectively. The Company maintained its cash in one financial institution during the years ended December 31, 2014 and 2013. Balances were insured up to Federal Deposit Insurance Corporation (“FDIC”) limits. At times, cash deposits exceeded the federally insured limits.

 

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, 2014 and 2013 as all accounts receivable were collected.

 

Equipment

 

Equipment is carried at cost less accumulated depreciation, computed using the straight-line method over the estimated useful lives. Leasehold improvements are depreciated over the shorter of the lease term or useful life, software is depreciated over 2 years, and equipment is depreciated over periods ranging from 3 to 5 years. Repairs and maintenance which do not extend the useful life of the asset are charged to expense as incurred. Gains and losses on sales and retirements are reflected in the consolidated statements of operations.

 

Intangible Assets 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 3 years, patents are being amortized over 5 years, and non-compete agreements are being amortized over 2 years.

 

The Company continually evaluates whether events or circumstances have occurred that indicate the remaining estimated useful lives of its definite-lived intangible assets may warrant revision or that the remaining balance of such assets may not be recoverable. The Company uses an estimate of the related undiscounted cash flows attributable to such asset over the remaining life of the asset in measuring whether the asset is recoverable.

 

The Company records goodwill as the excess of the purchase price over the fair values assigned to the net assets acquired in business combinations. Goodwill is allocated to reporting units as of the acquisition date for the purpose of goodwill impairment testing. The Company’s reporting units are those businesses for which discrete financial information is available and upon which segment management makes operating decisions. Goodwill of a reporting unit is tested for impairment at year-end, or between testing dates if an impairment condition or event is determined to have occurred.

 

In assessing potential impairment of the intangible assets recorded in connection with the MFS acquisition as of December 31, 2014, we considered the likelihood of future cash flows attributable to such assets, including but not limited to cash received from Boeing and the probability and extent of our participation in the DHS’s next generation BioWatch program and the what we believe to be a large market opportunity for our Firefly Dx product, once development is complete. Based on our analysis, we have concluded based on information currently available, that no impairment of the intangible assets exists as of December 31, 2014. 

 

The Company performed its annual impairment test of goodwill as of December 31, 2014.  As a result of this annual test, using the market capitalization method of valuation, it was determined that the goodwill balance of $510 thousand as of December 31, 2014 was not impaired.

 

Revenue Recognition

 

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

 

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

 

F- 9
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financials

December 31, 2014 and 2013

 

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

 

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

 

  (1) Revenues for professional services, which are of short term duration, are recognized when services are provided,

 

  (2) 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.

   

Convertible Notes With Variable Conversion Options

 

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

 

The Company accounts for debt issuance cost paid to lenders, or on behalf of lenders, in accordance with ASC 470, Debt. The costs associated with the issuance of debt are recorded as debt discount and amortized over the life of the underlying debt instrument.

 

Accounting for Derivatives

  

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

 

Fair Value of Financial Instruments and Fair Value Measurements

 

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

 

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

 

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

 

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

 

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

 

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.

 

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.

 

F- 10
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financials

December 31, 2014 and 2013

 

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.

 

  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, 2014 and 2013.

 

Research and Development Costs

 

The principal objective of our research and development program is to develop high-value molecular diagnostic products such as M-BAND and Firefly Dx. We focus our efforts on four main areas: 1) 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 $588,000 and $691,000 for the years ended December 31, 2014 and 2013, respectively.

 

Segments

 

The Company follows the guidance of ASC 280-10 for “Disclosures about Segments of an Enterprise and Related Information." During 2013 and 2012, the Company only operated in one segment; therefore, segment information has not been presented.

 

New Accounting Pronouncements

 

There are no new accounting pronouncements during the year ended December 31, 2014 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, 2014, including the pronouncements discussed below, are not expected to have a significant effect on the Company’s consolidated financial position or results of its’ operations.

 

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. The update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. This updated guidance is not expected to have a material impact on our results of operations, cash flows or financial condition. 

 

F- 11
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financials

December 31, 2014 and 2013

 

ASU 2014-12:

 

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

 

Entities may apply the amendments in this ASU either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. This updated guidance is not expected to have a material impact on our results of operations, cash flows or financial condition.

 

ASU 2014-15:

 

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

 

Loss Per Common Share

 

The Company presents basic income (loss) per common share and, if applicable, diluted income (loss) per share. Basic income (loss) per common share is based on the weighted average number of common shares outstanding during the year and after preferred stock dividend requirements. The calculation of diluted income (loss) per common share assumes that any dilutive convertible preferred shares outstanding at the beginning of each year or the date issued were convertible at those dates, with preferred stock dividend requirements and outstanding common shares adjusted accordingly. It also assumes that outstanding common shares were increased by shares issuable upon exercise of those stock options and warrants for which the average period market price exceeds the exercise price, less shares that could have been purchased by the Company with related proceeds. Additionally, shares issued upon conversion of convertible debt are included.

 

The following potentially dilutive equity securities outstanding as of December 31, 2014 and 2013 were not included in the computation of dilutive loss per common share because the effect would have been anti-dilutive (in thousands):

 

    December 31,
2014
    December 31,
2013
 
Common shares issuable under:                
Convertible notes     84,784       12,838  
Convertible Series F Preferred Stock     -       48,060  
Convertible Series I Preferred Stock     38,078       14,530  
Stock options     2,856       1,409  
Warrants     4,490       2,886  
Unvested restricted common stock     3,432       12,267  
      133,640       91,990  

 

F- 12
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financials

December 31, 2014 and 2013

 

3.   Acquisitions/Dispositions

 

Microfluidic Acquisition

 

On May 23, 2011, the Company acquired all of the outstanding capital stock of MFS in a transaction accounted for using the purchase method of accounting (the “Acquisition”). Since MFS's inception, its key personnel have had an important role in developing technologies to automate the process of biological pathogen detection. MFS’s substantial portfolio of intellectual property related to sample preparation and rapid medical testing applications is complementary to the Company’s portfolio of virus detection and diabetes management products in development.

 

In connection with the Acquisition, the Company was also required to make certain earn-out payments, which as of January 1, 2014 could total up to a maximum of $2,000,000 payable in shares of the Company’s common stock, upon certain conditions being achieved in 2014 (the “Earn-Out Payment”). There was also opportunity for the MFS sellers to achieve Earn-Out Payments in 2011 through 2013.  Targets were not met in any of the years 2011 - 2014.  The earn-out for 2014 was based on MFS achieving certain earnings targets for the respective year, subject to a maximum Earn-Out Payment of $2,000,000.  Additionally, approximately two-thirds of the earn-out is capped at $8.00 per share.  Further, the Company is prohibited from making any Earn-Out Payment until stockholder approval is obtained if the aggregate number of shares to be issued exceeds 19.99% of the Company’s common stock outstanding immediately prior to the closing. In the event the Company is unable to obtain any required stockholder approval, the Company is obligated to pay the applicable Earn-Out Payment in cash to the sellers. As of December 31, 2014, the earn-out period has expired and no monies are owed.

 

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

  

    (In thousands)  
Balance of contingent earnout liability as of January 1, 2013   $ 645  
Change in liability during 2013     (131 )
Balance of contingent earnout liability as of December 31, 2013     514  
Change in liability during year ended December 31, 2014     (514 )
Balance of contingent earnout liability as of December 31, 2014   $ -  

  

Sale of Subsidiary to Related Party

 

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

 

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

 

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

 

F- 13
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financials

December 31, 2014 and 2013

 

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

 

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

 

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

 

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

 

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

 

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

 

As a result, on November 8, 2013 the Company entered into a letter agreement (the “November Letter Agreement”) with VeriTeQ and on November 13, 2013, the Company entered into a Stock Purchase Agreement (“SPA”) with the Buyers. On November 13, 2013 VeriTeQ entered into a financing transaction with Hudson Bay Master Fund Ltd. (“Hudson”) and other participants, including most of the Buyers. On the one year anniversary of the transaction, or November 13, 2014, the shares and share equivalents sold to the Buyers would have had a combined value of approximately $3,000.

 

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

 

F- 14
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financials

December 31, 2014 and 2013

 

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

 

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

 

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

 

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

 

License of iglucose

 

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

   

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

 

In consideration for the rights and licenses discussed above, and the transfer of the domain names, SGMC shall pay to the Company the amount set forth below for each glucose test strip sold by SGMC and any 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.

  

F- 15
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financials

December 31, 2014 and 2013

 

4. Intangible Assets

 

Intangible assets consist of the following as of December 31, 2014 and 2013 (in thousands):

 

 

          December 31,  
          2014     2013  
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net     Accumulated
Amortization
    Net  
                               
Customer contracts and relationships   $ 230     $ (230 )   $ -     $ (198 )   $ 32  
Patents     1,223       (876 )     347       (632 )     591  
Non-compete agreements     169       (169 )     -       (169 )     -  
    $ 1,622     $ (1,276 )   $ 347     $ (999 )   $ 623  

 

Amortization of intangible assets amounted to approximately $277,000 and $357,000 for the year ended December 31, 2014 and 2013 respectively. Estimated future amortization expense is as follows (in thousands):

 

2015     245  
2016     102  
    $ 347  

 

5. Accrued Expenses

 

Accrued expenses and other current liabilities consisted of the following as of December 31, 2014 and 2013 (in thousands):

 

    December 31,
2014
    December 31,
2013
 
Accrued compensation   $ 359     $ 363  
Other     334       264  
    $ 693     $ 627  

 

6.   Equity and Debt Financing Agreements

 

Ironridge Series F Preferred Stock Financings

 

Beginning in July 2011, the Company entered into a series of financings with Ironridge involving the Company’s Series F convertible preferred stock. Between July 2011 and December 31, 2014, a total of 3,150 Series F shares have been issued and fully converted into a total of 60,017,961 common shares, as of the year ended December 31, 2014. No Series F shares have been redeemed. As of December 31, 2014 there are no shares of Series F outstanding.

 

On August 26, 2013, the Company entered into a Stock Purchase Agreement (the “Ironridge Stock Purchase Agreement”) and a Registration Rights Agreement (the “Ironridge Registration Rights Agreement” and, collectively, the “Ironridge Agreements”) with Ironridge Global IV, Ltd., a British Virgin Islands business company (“Ironridge”). Pursuant to the Ironridge Agreements, the Company agreed to issue 450 shares of Series F Preferred Stock (“Series F”) to Ironridge in exchange for $300,000. Additionally, the Company issued 100 shares and 50 shares of Series F as commitment and documentation fees, respectively. During the year ended December 31, 2014, these 600 shares of Series F were converted into 22,992,056 shares of common stock.

 

The Company had the option to buy back any shares of Series F at the liquidation value plus accrued dividends, without any premium. The Company also agreed to file a Registration Statement covering the common shares underlying the Series F within 30 days of closing and to use its best efforts to get the Registration Statement effective. As the Registration Statement was not effective within 90 days of closing on January 10, 2014 the Company issued 150 shares of Series F to Ironridge as liquidated damages, for which an expense in the amount of $150,000 has been recorded during the year ended December 31, 2014. On February 25, 2014, these 150 shares of Series F were converted into 3,398,389 shares of common stock.

 

F- 16
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financials

December 31, 2014 and 2013

 

On February 27, 2014, the Company entered into a Stock Purchase Agreement with Ironridge. Pursuant to the agreement, the Company agreed to issue 150 shares of Series F to Ironridge in exchange for $100,000. Additionally, the Company issued 50 shares of Series F as commitment and documentation fees which were recorded at face value of $50,000, and in March 2014 issued an additional 100 shares of Series F as liquidated damages, for which an expense in the amount of $100,000 was recorded, in fulfillment of its obligations under the agreement. During the year ended December 31, 2014, all of the 300 Series F shares were converted into 17,607,041 shares of common stock.

 

The table below provides a detail of the 3,150 Series F shares issued:      

 

Series F
Shares
Issued
    Date   Type of Consideration   Amount of   
Consideration
 
  500     August 15, 2011   Cash   $ 500,000  
  130     September 20, 2011   Cash     1  
  290     November 14, 2011   Cash     193,000  
  290     November 14, 2011   Cash     243,000  
  290     December 5, 2011   Cash     188,000  
  500     July 12, 2012   Termination Fee     0 (1)
  100     September 12, 2012   Waiver Fee     0 (1)
  450     August 26, 2013   Cash     300,000  
  150     August 26, 2013   Commitment and documentation fees     0 (1)
  150     January 10, 2014   Penalty Fee     0 (1)
  50     February 28, 2014   Documentation fees     0  
  150     February 28, 2014   Cash     100,000 (1)
  100     March 28, 2014   Penalty Fee     0  
  3,150             $ 1,524,001  

  

(1) These fees were paid to Ironridge through the issuance of Series F Preferred Stock as more fully described below.

 

The table below provides a detail of the 3,150 Series F which have been converted by the Company:

 

Series F Shares
Converted
    Date of Conversion
Notice
  Number of Shares of
Common
Issued on
Conversion (1)
 
  300     February 15, 2012     189,082  
  200     March 21, 2012     151,162  
  130     April 2, 2012     117,507  
  210     June 14, 2012     553,225  
  134     July 10, 2012     501,681  
  250     September 12, 2012     1,339,981  
  100     November 27, 2012     592,355  
  1,324     Total shares issued for year ended December 31, 2012     3,444,993  
                 
  176     January 7, 2013     724,090  
  100     January 30, 2013     395,690  
  100     March 4, 2013     477,828  
  100     April 19, 2013     655,993  
  50     May 16, 2013     522,140  
  50     May 17, 2013     522,245  
  50     June 21, 2013     937,230  
  50     July 11, 2013     1,357,646  
  50     September 24, 2013     3,582,620  
  50     November 12, 2013     3,400,000  
  776     Total shares issued for year ended December 31, 2013     12,575,482  
                 
  100     February 6, 2014     5,069,319  
  150     February 25, 2014     3,324,317  
  30     March 24, 2014     788,673  
  170     March 25, 2014     4,413,622  
  100     May 27, 2014     3,628,896  
  100     July 16, 2014     4,543,879  
  100     August 8, 2014     5,803,833  
  100     September 8, 2014     5,995,376  
  100     October 2, 2014     5,293,259  
  100     October 16, 2014     5,223,052  
  1,050     Total shares issued for year ended December 31, 2014     44,084,226  
                 
  3,150     Total shares issued     60,104,701  

 

(1) The shares of the Company’s common stock issued at the time a notice of conversion is subject to reconciliation based on the average of the daily VWAPs of the Common Stock, as reported by Bloomberg, for the 20 trading days following the notice of conversion. In addition, Ironridge is restricted from holding more than 9.99% of our total outstanding shares at any one time. In the event that the number of shares issuable pursuant to a notice of conversion would result in Ironridge holding more than 9.99% of the total outstanding shares of our common stock, such shares are held in escrow to be issued at a later date. The “Number of Shares Issued on Conversion” in the table represents the aggregate number of shares issued pursuant to the corresponding notice of conversion once all reconciliations have been taken into account.  

 

F- 17
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financials

December 31, 2014 and 2013

 

In connection with the Series F conversions, the Company recorded beneficial conversion dividends totaling $0.9 and $9.0 million during years ended December 31, 2014 and 2013 which represents the excess of fair value of the Company’s common stock at the date of issuance of the converted Series F Preferred Stock over the effective conversion rate, multiplied by the common shares issued upon conversion. These charges are non-cash charges.

 

Certificate of Designations for Series F Preferred Stock

 

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

  

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

 

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

 

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

 

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

 

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

 

F- 18
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financials

December 31, 2014 and 2013

 

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

 

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

 

Due to the above variations in the conversion price, the beneficial conversion feature is considered contingent and not measurable or recorded until the actual conversion dates. The beneficial conversion feature is recorded as a constructive dividend and was $1.4 million for the year ended December 31, 2014.

 

Convertible Note Financings

 

Short-term convertible debt for the year ended December 31, 2014 as follows (In thousands):

 

    Notes     Accrued
Interest
    Total  
                   
Convertible notes with accrued interest accounted for as stock settled debt   $ 534     $ 47     $ 581  
Conversion premiums     237             237  
      771       47       818  
                         
Convertible notes with embedded derivatives     1,900       68       1,968  
Derivative discounts     (1,038 )           (1,038 )
      862       68       930  
                         
Original issue discounts and loan fee discounts     (221 )           (221 )
    $ 1,412     $ 115     $ 1,527  

 

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

 

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

 

F- 19
 

   

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financials

December 31, 2014 and 2013

 

On February 27, 2013, the Company borrowed $75,000 pursuant to a convertible note, in connection with which it issued the lender immediately exercisable warrants to purchase 68,182 shares of common stock at an initial exercise price of $0.55 per share.  The debt was recorded at a discount in the amount of $28,125, representing the relative fair value of the warrants. Additionally, a liability of $35,687 was recorded as the fair value of the warrant as a result of a down round adjustment to the exercise price of the warrants. In connection with the issuance of the $75,000 note there is a beneficial conversion feature of approximately $18,750, which will be amortized over the one year term of the note. During 2013, the note principal and interest was fully converted into an aggregate of 4,155,937 shares of common stock. All related debt discount and beneficial conversion feature were fully amortized in conjunction with the conversion of the note. During the year ended December 31, 2014, the warrants were converted, on a cashless basis, into 2,304,215 shares of common stock.

 

On June 4, 2013, the Company borrowed $50,000 pursuant to a convertible note, in connection with which it issued the lender immediately exercisable warrants to purchase 104,167 shares of common stock at an initial exercise price of $0.24 per share.  The debt was recorded at a discount in the amount of $23,684, representing the relative fair value of the warrants.  The debt shall accrete in value over its one year term to its face value of approximately $50,000. Additionally, a liability of $23,223 was recorded as the fair value of the warrant as a result of a down round adjustment to the exercise price of the warrants. In connection with the issuance of the $50,000 note there is a beneficial conversion feature of approximately $12,500, which will be amortized over the one year term of the note. In 2013, $47,850 principal balance of the convertible note was converted into 2,600,000 shares of common stock. During the three months ended September 30, 2014, remaining balance of the note principal and interest was fully converted into 725,734 shares of common stock. All related debt discount and beneficial conversion feature were fully amortized in conjunction with the conversion of the note. During the year ended December 31, 2014, the warrants were converted, on a cashless basis, into 1,508,848 shares of common stock.

On July 3, 2013, the Company entered into a Securities Purchase Agreement for a new convertible promissory note (the "Purchase Agreement"). Pursuant to the terms of the Purchase Agreement the investor committed to purchase an 8% Convertible Promissory Note (the "Convertible Promissory Note") in the principal amount of $78,500, with a maturity date of April 8, 2014, convertible into shares of common stock, $0.01 par value per share, of the Company, upon the terms and subject to the limitations and conditions set forth in such Convertible Promissory Note. Interest shall commence accruing on the date that the Note is issued and shall be computed on the basis of a 365-day year and the actual number of days elapsed. The holder may convert the Convertible Promissory Note into common shares of stock at a 42% discount to the price of common shares in the ten days prior to conversion. In connection with the issuance of the Convertible Promissory Note, the Company recorded a premium of $56,845 which was amortized over the life of the Note. During the year ended December 31, 2014, the outstanding principal and interest on the Convertible Promissory Note was converted, into 5,790,072 shares of common stock.

 

On December 13, 2013, the Company entered into a Securities Purchase Agreement for a new convertible promissory note (the “December Purchase Agreement”). Pursuant to the terms of the December Purchase Agreement the investor committed to purchase an 8% Convertible Promissory Note (the “December Convertible Promissory Note”) in the principal amount of $103,500, with a maturity date of September 17, 2014, convertible into shares of common stock, $0.01 par value per share, of the Company (the “Common Stock”), upon the terms and subject to the limitations and conditions set forth in such December Convertible Promissory Note. Interest shall commence accruing on the date that such note is issued and shall be computed on the basis of a 365-day year and the actual number of days elapsed. The holder may convert the December Convertible Promissory Note into common shares of stock at a 39% discount to the price of common shares in the ten days prior to conversion. In connection with the issuance of the December Convertible Promissory Note, the Company computed a premium of $66,172 all of which was amortized as of June 30, 2014. During the year ended December 31, 2014, the outstanding principal and interest on the December Convertible Promissory Note was converted, into 3,294,466 shares of common stock.

 

On January 24, 2014, the Company entered into a Securities Purchase Agreement for a convertible promissory note (the “January Purchase Agreement”). Pursuant to the terms of the January Purchase Agreement the investor committed to purchase an 8% Convertible Promissory Note (the “January Convertible Promissory Note”) in the principal amount of $78,500 with a maturity date of October 28, 2014, convertible into shares Common Stock, upon the terms and subject to the limitations and conditions set forth in such Convertible Promissory Note. Interest shall commence accruing on the date that such note is issued and shall be computed on the basis of a 365-day year and the actual number of days elapsed. The holder may convert the January Convertible Promissory Note into common shares of stock at a 39% discount to the price of common shares in the ten days prior to conversion. In connection with the issuance of the January Convertible Promissory Note, the Company recorded a computed of $50,189 as the note is considered stock settled debt under ASC 480, all of which was amortized as of the year ended December 31, 2014. During the year ended December 31, 2014, the outstanding principal and interest on the January Convertible Promissory Note was converted, into 3,132,485 shares of common stock.

 

F- 20
 

   

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financials

December 31, 2014 and 2013

 

On February 20, 2014, the Company borrowed $82,500 pursuant to a convertible note with an OID of $7,500 resulting in cash received of $75,000. The debt matures twenty four months from the date funded, has a one-time 10% interest charge if not paid within 90 days, and is convertible at the option of the lender into shares of the Company’s common stock at the lesser of $0.042 per share or 60% of the average of the two lowest closing 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 $75,000 which has been fully amortized as of the year ended December 31, 2014. As of December 31, 2014, the outstanding principal and interest of the Note was converted, into 4,756,739 shares of common stock. As the note conversion includes a “lesser of” pricing provision, a derivative liability of $91,061 was recorded when the note was entered into. The derivative liability was remeasured at each balance sheet date and was reclassified to equity on a pro-rata basis upon conversion of the note.

 

On February 21, 2014, the Company entered into a financing arrangement pursuant to which it borrowed $100,000 in unsecured debt, convertible at the discretion of the lender. The debt was issued at a 10% discount, matures on August 21, 2014, has an interest rate of 10%, and is convertible at the option of the lender into shares of the Company’s common stock at a 40% discount to the lowest closing bid price in the 20 trading days prior to conversion.  In connection with the issuance of the note, the Company computed a premium of $66,667 as the note is considered stock settled debt under ASC 480, all of which was accreted and charged to interest expense in the year ended December 31, 2014. During the year ended December 31, 2014, the outstanding principal and interest on the Convertible Promissory Note was converted, into 4,149,378 shares of common stock.

 

On March 13, 2014, the Company borrowed two notes of $75,000, each from a separate lender with maturity dates of March 4, 2015. Under each agreement the Company received $65,750, which was net of legal and due diligence fees. The notes bear interest at 8% per annum and are convertible at the option of the lender into shares of the Company’s common stock at a 40% discount to the lowest closing bid price in the 20 trading days prior to conversion.  The notes might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In conjunction with each note the Company also issued an additional note, of identical terms, each for $75,000. The additional note was paid for by the issuance of a note payable from the lenders to the Company. In the event that the original note is not repaid prior to six months from its issuance, the lender has the option of converting the additional note into shares of the Company’s common stock at a 40% discount to lowest closing bid price in the 20 trading days prior to conversion, subject to the notes payable to the Company having been paid in full.  The additional note payable has been netted with the related note receivable. In connection with the issuance of the notes, the Company computed a premium of $100,000 as the debt is considered a stock settled debt under ASC 480, all of which was amortized during the year ended December 31, 2014. As of December 31, 2014 the outstanding principal and interest was converted, into 16,386,485 shares of common stock. On May 5, 2014 one of the $75,000 notes receivable due to the company was paid, for which the Company received $65,750, net of fees. The Company computed a premium of $50,000 as the debt is considered a stock settled debt under ASC 480, all of which was amortized during the year ended December 31, 2014. As of December 31, 2014 the outstanding principal and interest was converted, into 4,117,795 shares of common stock. Concurrent with the repayment the Company and the lender entered into two new convertible notes, for $75,000 each, on identical terms to the March 4, 2014 convertible notes. Each of these two notes was paid for by the issuance of notes payable from the lenders to the Company, each for $75,000, on identical terms to the March 4, 2014 notes. These two new notes have been netted for presentation purposes. In connection with the payment of the note receivable to the Company, the Company recorded a premium of $50,000 related to one of the additional notes that had been entered into on March 4, 2014, all of which was amortized as of the year ended December 31, 2014. As of December 31, 2014 the outstanding principal and interest was converted, into 4,166,386 shares of common stock.

 

On March 24, 2014, the Company borrowed $52,500 with a maturity date of March 19, 2015, pursuant to a financing agreement. Under the agreement the Company received $46,000, which was net of legal and due diligence fees. The note bears interest at 8% per annum and is convertible at the option of the lender into shares of the Company’s common stock at a 40% discount to the lowest closing bid price in the 20 trading days prior to conversion.  The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the notes, the Company recorded a premium of $35,000 as the note is considered stock settled debt under ASC 480, all of which was accreted and charged to interest expense in the year ended December 31, 2014. As of December 31, 2014, the outstanding principal and interest on the note was converted, into 3,043,515 shares of common stock.

 

On April 7, 2014, the Company borrowed $50,000 with a maturity date of April 4, 2015, pursuant to a financing agreement. Under the agreement the Company received $44,000, which was net of legal and due diligence fees. The note bears interest at 8% per annum and is convertible at the option of the lender into shares of the Company’s common stock at a 40% discount to the price of common shares in the twenty days prior to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the note, the Company computed a premium of $33,333 as the note is considered stock settled debt under ASC 480, all of which was accreted and charged to interest expense in the year ended December 31, 2014. As of December 31, 2014, the outstanding principal and interest on the note was converted, into 2,888,888 shares of common stock.

  

On April 14, 2014, the Company borrowed $63,000 with a maturity date of January 2, 2015, pursuant to a financing agreement. Under the agreement the Company received $60,000, which was net of legal fees. The note bears interest at 8% per annum and is convertible at the option of the lender into shares of the Company’s common stock at a 39% discount to the price of common shares in the ten days prior to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the note, the Company computed a premium of $40,279 as the note is considered stock settled debt under ASC 480, all of which was accreted and charged to interest expense in the year ended December 31, 2014. As of December 31, 2014, the outstanding principal and interest on the note was converted, into 3,102,713 shares of common stock.

 

F- 21
 

  

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financials

December 31, 2014 and 2013

 

On April 16, 2014, the Company borrowed $110,000 pursuant to a convertible note with an OID of $10,000 resulting in cash received of $100,000. The debt matures twenty four months from the date funded, has a one-time 10% interest charge if not paid within 90 days, and is convertible at the option of the lender into shares of the Company’s common stock at the lesser of $0.042 per share or 60% of the average of the two lowest closing 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 $139,997, which has been fully amortized during the year ended December 31, 2014. As of December 31, 2014, the outstanding principal and interest of the Note was converted, into 6,910,704 shares of common stock. As the note conversion includes a “lesser of” pricing provision, a derivative liability of $139,997 was recorded when the note was entered into. The derivative liability was remeasured at each balance sheet date and was reclassified to equity on a pro-rata basis upon conversion of the note.

 

On April 25, 2014, the Company borrowed $50,000 with a maturity date of January 25, 2015, pursuant to a financing agreement. Under the agreement the Company received $45,000, which was net of legal and due diligence fees. The note bears interest at 8% per annum and is convertible at the option of the lender into shares of the Company’s common stock at a 40% discount to the price of common shares in the ten days prior to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the note, the Company computed a premium of $33,333 as the note is considered stock settled debt under ASC 480, all of which was accreted and charged to interest expense in the year ended December 31, 2014. As of December 31, 2014, the outstanding principal and interest on the note was converted, into 2,890,411 shares of common stock.

 

On May 30, 2014, the Company borrowed $63,000 with a maturity date of February 27, 2015, pursuant to a financing agreement. Under the agreement the Company received $60,000, which was net of legal fees. The note bears interest at 8% per annum and is convertible at the option of the lender into shares of the Company’s common stock at a 39% discount to the price of common shares in the ten days prior to conversion. The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the note, the Company computed a premium of $40,279 as the note is considered stock settled debt under ASC 480, all of which was accreted and charged to interest expense in the year ended December 31, 2014. As of December 31, 2014, the Company exercised its right to prepay the outstanding principal and interest for a total redemption amount of $87,536.

 

On June 18, 2014, the Company borrowed $55,000 with a maturity date of June 17, 2016, pursuant to a convertible note. The debt was issued at a 10% original issue discount resulting in proceeds of $50,000, has an interest rate of 10%, and is convertible at the option of the lender into shares of the Company’s common stock at the lesser of (i) a 40% discount to the lowest closing bid price in the 20 trading days prior to conversion or (ii) $0.075. The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the notes, the Company recorded a debt discount of $50,000 related to the derivative liability. The amortization expense related to that debt discount recorded for the year ended December 31, 2014 was $38,291. As of December 31, 2014, the outstanding principal and interest on the notes was $58,240. As the note conversion includes a “lesser of” pricing provision, a derivative liability of $59,623 was recorded when the note was entered into. The derivative liability is remeasured at each balance sheet date and was $53,436 at December 31, 2014.

 

On June 19, 2014, the Company borrowed of $25,000, with a maturity date of June 17, 2015, pursuant to a financing agreement. Under the agreement the Company received $22,000, which was net of legal and due diligence fees. The notes bear interest at 8% per annum and are convertible at the option of the lender into shares of the Company’s common stock at a 40% discount to the lowest closing bid price in the 20 trading days prior to conversion.  The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the note, the Company computed a premium of $16,667 as the note is considered stock settled debt under ASC 480, all of which was accreted and charged to interest expense in the year ended December 31, 2014. As of December 31, 2014, the Company exercised its right to prepay the outstanding principal and interest for a total redemption amount of $35,956.

 

On June 20, 2014, the Company borrowed $40,000 with a maturity date of June 17, 2015, pursuant to a financing agreement. Under the agreement the Company received $36,000, which was net of legal and due diligence fees. The note bears interest at 8% per annum and is convertible at the option of the lender into shares of the Company’s common stock at a 40% discount to the lowest closing bid price in the 20 trading days prior to conversion.  The note might be accelerated if an event of default occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent in its SEC filings. In connection with the issuance of the notes, the Company computed a premium of $26,667 as the note is considered stock settled debt under ASC 480, all of which was accreted and charged to interest expense in the year ended December 31, 2014. As of December 31, 2014, the Company exercised its right to prepay the outstanding principal and interest for a total redemption amount of $57,517.

 

F- 22
 

  

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financials

December 31, 2014 and 2013

 

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