PositiveID
POSITIVEID Corp (Form: 10-Q, Received: 05/13/2011 16:33:19)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

(Mark One)


þ

 

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


For the quarterly period ended March 31, 2011

Or


o

 

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

 

(I.R.S. Employer Identification No.)

organization)

 

 

 

 

 

1690 South Congress Avenue, Suite 200

 

 

Delray Beach, Florida 33445

 

(561) 805-8008

(Address of principal executive offices,

 

(Registrant’s telephone number, including area code)

including zip code)

 

 


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


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


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


Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer o

 

Smaller reporting company þ

  

 

 

 

(Do not check if a smaller reporting company)

 

 


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


The number of shares outstanding of each of the issuer’s classes of common stock as of the close of business on May 9, 2011 is as follows:


Class

 

Number of Shares

Common Stock: $0.01 Par Value

 

37,430,076

 



POSITIVEID CORPORATION

TABLE OF CONTENTS


PART I —FINANCIAL INFORMATION

1

 

 

ITEM 1. FINANCIAL STATEMENTS

1

 

 

Condensed Consolidated Balance Sheets — March 31, 2011 and December 31, 2010

1

 

 

Unaudited Condensed Consolidated Statements Of Operations — Three Months Ended March 31, 2011 and 2010

2

 

 

Unaudited Condensed Consolidated Statement Of Stockholders’ Equity — Three Months Ended March 31, 2011

3

 

 

Unaudited Condensed Consolidated Statements Of Cash Flows — Three Months Ended March 31, 2011 and 2010

4

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

24

 

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

26

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

30

 

 

ITEM 4. CONTROLS AND PROCEDURES

30

 

 

PART II — OTHER INFORMATION

31

 

 

ITEM 1. LEGAL PROCEEDINGS

31

 

 

ITEM 1A. RISK FACTORS

31

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

31

 

 

ITEM 5. OTHER INFORMATION

32

 

 

ITEM 6. EXHIBITS

32

 

 

SIGNATURES

33




PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

POSITIVEID CORPORATION

Consolidated Balance Sheets

(In thousands, except share data and par value)


 

 

March 31,

 

 

December 31,

 

 

 

2011

 

 

2010

 

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash

 

$

2,188

 

 

$

1,764

 

Prepaid expenses and other current assets

 

 

185

 

 

 

173

 

Total Current Assets

 

 

2,373

 

 

 

1,937

 

 

 

 

 

 

 

 

 

 

Equipment, net of accumulated depreciation

 

 

117

 

 

 

119

 

Goodwill

 

 

850

 

 

 

850

 

Intangibles

 

 

385

 

 

 

385

 

Other assets

 

 

24

 

 

 

24

 

 

 

 

 

 

 

 

 

 

 

 

$

3,749

 

 

$

3,315

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

445

 

 

$

490

 

Accrued expenses and other current liabilities

 

 

889

 

 

 

1,067

 

Accrued preferred stock dividend payable

 

 

248

 

 

 

152

 

Total Current Liabilities

 

 

1,582

 

 

 

1,709

 


Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Preferred stock, authorized 5,000,000 shares of $.001 par value; Series A Preferred - 0 shares issued and outstanding at March 31, 2011 and December 31, 2010; Series B Preferred - 420 and 230 shares issued and outstanding and liquidation preference of $4,200 and $2,300 at March 31, 2011 and December 31, 2010, respectively; Series C – no shared issued or outstanding at March 31, 2011 and December 31, 2010.

 

 

 

 

 

 

Common stock, authorized 70,000,000 shares of $.01 par value; issued and outstanding: 37,430,076 and 33,047,405 shares at March 31, 2011 and December 31, 2010, respectively

 

 

374

 

 

 

330

 

 

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

79,298

 

 

 

74,002

 

Accumulated deficit

 

 

(71,835)

 

 

 

(69,621)

 

 

 

 

7,837

 

 

 

4,711

 

Note receivable for shares issued

 

 

(5,670)

 

 

 

(3,105)

 

 

 

 

 

 

 

 

 

 

Total Stockholders’ Equity

 

 

2,167

 

 

 

1,606

 

 

 

$

3,749

 

 

$

3,315

 

 

 

 

 

 

 

 


See accompanying notes to unaudited condensed consolidated financial statements.


1




POSITIVEID CORPORATION

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(unaudited)

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

 

2010

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

593

 

 

$

673

 

Cost of sales

 

 

60

 

 

 

216

 

 

 

 

 

 

 

 

Gross profit

 

 

533

 

 

 

457

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

2,431

 

 

 

3,780

 

Research and development

 

 

382

 

 

 

538

 

 

 

 

 

 

 

 

Total operating expenses

 

 

2,813

 

 

 

4,318

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(2,280

)

 

 

(3,861

)

 

 

 

 

 

 

 

 

 

Other income, net

 

 

66

 

 

 

15

 

 

 

 

 

 

 

 

Net loss

 

 

(2,214

)

 

 

(3,846

)

Preferred stock dividend

 

 

(96

)

 

 

(114

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(2,310

)

 

$

(3,960

)

 

 

 

 

 

 

 

Net loss attributable to common shareholders per common share — basic and diluted

 

$

(0.08

)

 

$

(0.20

)

 

 

 

 

 

 

 

Weighted average number of shares outstanding — basic and diluted

 

 

29,990

 

 

 

19,865

 

 

 

 

 

 

 

 


See accompanying notes to unaudited condensed consolidated financial statements.


2




POSITIVEID CORPORATION

Condensed Consolidated Statement of Stockholders’ Equity

For the Three Months Ended March 31, 2011

(In thousands)

(Unaudited)


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Note Receivable

 

 

Total

 

 

 

Preferred Shares

 

 

Common Shares

 

 

Paid-in

 

 

Accumulated

 

 

For Shares

 

 

Stockholders’

 

 

 

Number

 

 

Amount

 

 

Number

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Issued

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2010

 

 

230

 

 

 

 

 

 

33,047

 

 

$

330

 

 

$

74,002

 

 

$

(69,621)

 

 

$

(3,105)

 

 

$

1,606

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,214)

 

 

 

 

 

 

(2,214)

 

Stock based compensation

 

 

 

 

 

 

 

 

710

 

 

 

7

 

 

 

964

 

 

 

 

 

 

 

 

 

971

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Series B Preferred Shares

 

 

190

 

 

 

 

 

 

 

 

 

 

 

 

1,900

 

 

 

 

 

 

 

 

 

1,900

 

Accrual of dividend for Series B Preferred Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(96

)

 

 

 

 

 

 

 

 

(96)

 

 

Issuance of shares for note receivable

 

 

 

 

 

 

 

 

 

 

 

27

 

 

 

1,873

 

 

 

— 

 

 

 

(1,900)

 

 

 

 

Issuance of shares for note receivable upon warrant exercise

 

 

 

 

 

 

 

 

3,672

 

 

 

10

 

 

 

655

 

 

 

 

 

 

(665)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance March 31, 2011

 

 

420

 

 

 

 

 

 

37,429

 

 

$

374

 

 

$

79,298

 

 

$

(71,835)

 

 

$

(5,670)

 

 

$

2,167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


See accompanying notes to unaudited condensed consolidated financial statements.


3




POSITIVEID CORPORATION

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)


 

 

For the Three Months Ended

March 31,

 

 

2011

 

2010

Cash flows from operating activities:

 

 

 

 

Net loss

$

(2,214)

$

(3,846)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

Depreciation and amortization

 

8

 

546

Stock based compensation

 

971

 

1,094

In process research and development allocation from asset purchase

 

 

351

Non cash interest income

 

(29)

 

Changes in operating assets and liabilities:

 

 

 

 

Decrease (increase) in prepaid expenses and other current assets

 

17

 

(68)

(Decrease) increase in accounts payable and accrued expenses

 

(222)

 

111

Net cash used in operating activities

 

(1,469)

 

(1,812)

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

Purchase of equipment

 

(7)

 

(19)

Net cash used in investing activities

 

(7)

 

(19)

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

Issuance of Series B Preferred Shares

 

1,900

 

Proceeds from exercise of stock options

 

 

319

Net cash provided by financing activities

 

1,900

 

319

 

 

 

 

 

Net increase (decrease)  in cash

 

424

 

(1,512)

Cash, beginning of period

 

1,764

 

6,423

Cash, end of period

$

2,188

$

4,911


See accompanying notes to unaudited condensed consolidated financial statements.


4




POSITIVEID CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(tabulated amounts in thousands of dollars, except per share amounts)


1. Business and Basis of Presentation

PositiveID Corporation, a Delaware corporation, completed an initial public offering in February 2007.  In November 2008, the Company entered into an Asset Purchase Agreement (“APA”) with Digital Angel Corporation and Destron Fearing Corporation, a wholly-owned subsidiary of Digital Angel Corporation, which collectively are referred to as, “Digital Angel.” The terms of the APA included 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 and Destron Fearing that will 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.

Also, in November 2008, R & R Consulting Partners LLC, a company controlled by our Chairman and Chief Executive Officer, purchased 5,355,556 shares of common stock from Digital Angel, at which point in time Digital Angel ceased being a stockholder.

In September 2009, we, VeriChip Acquisition Corp., a Delaware corporation and our wholly-owned subsidiary (the “Acquisition Subsidiary”), and Steel Vault Corporation, a Delaware corporation (“Steel Vault”), signed an Agreement and Plan of Reorganization (the “Merger Agreement”), as amended, pursuant to which the Acquisition Subsidiary was merged with and into Steel Vault in November 2009, with Steel Vault surviving and becoming our wholly-owned subsidiary (the “Merger”). Upon the consummation of the Merger, each outstanding share of Steel Vault’s common stock, warrants and options was converted into 0.5 shares of our common stock, warrants and options. At the closing of the Merger, we changed our name from VeriChip Corporation to PositiveID Corporation, and changed our stock ticker symbol with Nasdaq to “PSID”.

In February 2010, we acquired the assets of Easy Check Medical Diagnostics, LLC, which included the Easy Check breath glucose detection system and the iglucose wireless communication system. These products are currently under development. In exchange for the assets, we issued 300,000 shares of our common stock valued at approximately $351,000. Additional payment in the form of shares (maximum 200,000 shares) and product royalties may be paid in the future based on successful patent grants and product or license revenues.  In February 2011 we amended that agreement, paying the seller of the assets an additional 200,000 shares of our common stock and lowering the potential royalty on revenue from these products from 25% to 10%.

Segment Information

We have historically developed, marketed and sold radio frequency identification, frequently referred to as RFID, systems used in the healthcare market for the identification of people. Beginning in the fourth quarter of 2009, with the merger of VeriChip Corporation and Steel Vault, we focused our strategy to provide unique health and security identification tools to protect consumers and businesses, operating in two key segments: HealthID and ID Security. Beginning in early 2011 we have further focused our strategy on the growth of our HealthID segment, including the continued successful development of our GlucoChip, our Easy Check breath glucose measurement device, our iglucose wireless system, and potential strategic acquisition opportunities of businesses that are complementary to our HealthID business. In conjunction with this shift, in early 2011, we ceased acquiring new subscribers to our identity security and credit reporting businesses and, accordingly, we anticipate that our revenues from this segment in 2011 will decline significantly from 2010 amounts.

Recent Developments

In 2010 and 2011, we entered into financing transactions pursuant to which we offered shares of our common stock and Preferred Stock.  Please see “Note 3, “Financing Agreements,” to these consolidated financial statements for more information regarding these transactions.

On February 24, 2011, we issued 200,000 shares of our common stock to Easy Check Medical Diagnostics, LLC, or Easy Check, to amend the Asset Purchase Agreement, dated February 24, 2010, with Easy Check.  Please see Note 2, "Acquisitions," to these consolidated financial statements for more information regarding this transaction.  

On May 9, 2011, we entered into a Stock Purchase Agreement to acquire MicroFluidic Systems.  For more information, please see Note 10, "Subsequent Events," to these consolidated financial statements.


5




POSITIVEID CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(tabulated amounts in thousands of dollars, except per share amounts)


VeriChip, Health Link, VeriMed, VeriTrace, and NationalCreditReport.com are our registered trademarks. GlucoChip, iglucose inside, iglucose , Wireless Body and Easy Check are our trademarks. This Quarterly Report on Form 10-Q contains trademarks and trade names of other organizations and corporations.

The financial statements include the accounts of the Company and NationalCreditReport.com, its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries as of March 31, 2011 and December 31, 2010 (the December 31, 2010 financial information included in this report has been derived from the Company’s audited financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2010), and for the three months ended March 31, 2011 and 2010 have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments (including normal recurring adjustments) considered necessary to present fairly the unaudited condensed consolidated financial statements have been made. Certain items in the March 31, 2010 period have been reclassified for comparative purposes.

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 sales and expenses during the reporting period. Actual results could differ from those estimates. Included in these estimates are assumptions about allowances for excess inventory, bad debt reserves, lives of long lived assets, lives of intangible assets, assumptions used in Black-Scholes valuation models, estimates of the fair value of acquired assets and assumed liabilities, the determination of whether any impairment is to be recognized on goodwill or intangibles, among others.

The unaudited condensed consolidated statements of operations for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the entire year. These statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Revenue Recognition

The Company’s revenue recognition policy is as follows:

Product Sales

Revenue from product sales is recorded at gross amounts. As the Company is in the early stage of commercializing these products, the level of returns cannot yet be reasonably estimated. Accordingly, the Company does not recognize revenues until the following criteria are met:


·

a purchase order has been received or a contract has been executed;

·

the product is shipped;

·

title has transferred;

·

the price is fixed or determinable;

·

there are no uncertainties regarding customer acceptance;

·

collection of the sales proceeds is reasonably assured; and

·

the period during which the customer has a right to return the product has elapsed.


Data Subscription Services

The services for maintaining subscriber information on the Company’s iglucose, Health Link and VeriMed databases are sold on a stand-alone contract basis, and treated according to the terms of the contractual arrangements then in effect. Revenue from the database service will be recognized over the term of the subscription period or the terms of the contractual arrangements then in effect.

With respect to the sales of products whose functionality is dependent on services (e.g., database records maintenance), the revenue recognition policy will follow the ultimate arrangements.


6




POSITIVEID CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(tabulated amounts in thousands of dollars, except per share amounts)


ID Security Services

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. A significant portion of the Company’s revenue is derived from the Company’s processing of transactions related to the provision of information services to customers, in which case revenue is recognized, assuming all other revenue recognition criteria are met, when the services are provided. Another portion of the Company’s revenues relate substantially to monthly subscription fee-based credit monitoring contracts under which a customer pays a preset fee for a predetermined or unlimited number of transactions or services provided during the subscription period. Revenue related to subscription fee-based contracts having an unlimited volume is recognized ratably during the contract term.

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 conjunction with the Company’s decision at the end of 2010 to cease acquiring new customers, it evaluated the Steel Vault business model and recoverability of its intangible assets by estimating the projected operating cash flows and estimated residual value of the NationalCreditReport.com business. As a result, the Company recorded a charge for the impairment of its goodwill of $1.6 million in the fourth quarter of 2010.  Effective December 31, 2010, the Company adjusted the rate of amortization of its trademarks and domain names to reflect the estimated residual value over its estimated remaining economic life.

In October 2009, the Financial Accounting Standard Board (“FASB”) issued amended revenue recognition guidance for arrangements with multiple deliverables. The guidance requires the use of management’s best estimate of selling price (BESP) for the deliverables in an arrangement when vendor specific objective evidence (VSOE), vendor objective evidence (VOE) or third party evidence (TPE) 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. In accordance with the guidance, the Company has elected to early adopt its provisions as of January 1, 2010 on a prospective basis for all new or materially modified arrangements entered into on or after that date. The adoption of this guidance did not have a material impact on the consolidated financial statements.

As discussed above, effective January 1, 2010 the Company adopted, on a prospective basis for all new or materially modified arrangements entered into on or after that date, the amended accounting guidance for multiple-deliverable revenue arrangements and the amended guidance related to the scope of existing software revenue recognition guidance. The amended guidance does not generally change the units of accounting for the Company’s revenue transactions. Most of the Company’s products and services qualify as separate units of accounting.

To the extent the Company sells products that may consist of multiple deliverables the revenue recognition is subject to specific guidance. A multiple-deliverable arrangement is separated into more than one unit of accounting if the following criteria are met:


·

The delivered item(s) has value to the client on a stand-alone basis; and

·

If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the Company’s control.


If these criteria are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered. If these criteria are met for each element and there is a relative selling price for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative selling price.

Deferred revenue consists of amounts billed in excess of revenue recognized on sales of information services, relating generally to subscription fees.


7




POSITIVEID CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(tabulated amounts in thousands of dollars, except per share amounts)


Long Lived Assets

In conjunction with the Company’s decision at the end of 2010 to cease acquiring new customers, it evaluated the Steel Vault business model and recoverability of its intangible assets by estimating the projected operating cash flows and estimated residual value of the NationalCreditReport.com business. As a result, the Company recorded a charge for the impairment of its goodwill of $1.6 million in the fourth quarter of 2010.  Effective December 31, 2010, the Company adjusted the rate of amortization of its trademarks and domain names to reflect the estimated residual value over its estimated remaining economic life.

Stock-Based Compensation

Stock-based compensation expense is recognized using the fair-value based method for all awards granted on or after the date of adoption. Compensation expense is recognized over the requisite service period based on the grant-date fair value of those options.

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.

Stock-based compensation expense is reflected in the consolidated statement of operations in either selling, general and administrative expense or research and development expense.

The Black-Scholes option pricing model, which we use to value our stock options, requires us to make several key judgments including:


·

the estimated value of our common stock;

·

the expected life of issued stock options;

·

the expected volatility of our stock price;

·

the expected dividend yield to be realized over the life of the stock options; and

·

the risk-free interest rate over the expected life of the stock options.


Our 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. Our computation of volatility is based on the historical volatility of our common stock.

Research and Development

Research and development costs are expensed as incurred and consist of development work associated with the Company’s product under development. The Company’s research and development expenses relate primarily to cash and share-based compensation to its project partner Receptors, LLC for the development of a sensor in the glucochip project and for development of the rapid virus detection system, payroll costs for engineering personnel and costs associated with various projects, including testing, developing prototypes and related expenses.

Loss Per Common Share and Common Share Equivalent

The Company presents “basic” income (loss) per common share and, if applicable “diluted” income per share, pursuant to the provisions of ASC 260 “Earnings Per Share.” Basic income (loss) per common share is based on the weighted average number of common shares outstanding in each 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 average period market price exceeds exercise price, less shares that could have been purchased by the Company with related proceeds.


8




POSITIVEID CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(tabulated amounts in thousands of dollars, except per share amounts)


On April 29, 2010, we presented Socius Technology with a notice to purchase $2.3 million of Preferred Stock. Upon the closing of the preferred tranche, which occurred on May 4, 2010, we issued 230 shares of Preferred Stock. In connection with the notice, we also presented Socius with a notice to purchase $2.3 million of common stock and warrants (exercisable to purchase 600,746 shares of common stock). We issued 1,716,417 shares of common stock at $1.34 per share, and a warrant to purchase 600,746 shares of common stock to Socius, exercisable at $1.34, and received a promissory note in payment. Socius exercised the warrant on April 29, 2010 and paid the exercise price using a secured promissory note.

On January 13, 2011, we presented Socius Technology with a notice to purchase $1.7 million of Preferred Stock. Upon the closing of the preferred tranche, we issued 168 shares of Preferred Stock. In connection with the notice, we also presented Socius with a notice to purchase $1.7 million of common stock and warrants (exercisable to purchase 852,174 shares of common stock). We issued 2,434,783 shares of common stock at $0.69 per share, and a warrant to purchase 852,174 shares of common stock to Socius, exercisable at $0.69, and received a promissory note in payment. Socius exercised the warrant on January 13, 2011 and paid the exercise price using a secured promissory note.

On January 28, 2011, we presented Socius Technology with a notice to purchase $0.2 million of Preferred Stock. Upon the closing of the preferred tranche, we issued 22 shares of Preferred Stock. In connection with the notice, we also presented Socius with a notice to purchase $0.2 million of common stock and warrants (exercisable to purchase 100,000 shares of common stock). We issued 285,714 shares of common stock at $0.77 per share and a warrant to purchase 100,000 shares of common stock to Socius, exercisable at $0.77, and received a promissory note in payment. Socius exercised the warrant on January 28, 2011 and paid the exercise price using a secured promissory note.

The following were outstanding as of March 31, 2011 and 2010, and were not included in the computation of dilutive loss per share because the net effect would have been anti-dilutive:


 

 

Three Months Ended

March 31,

 

 

2011

 

 

2010

 

 

(in thousands)

Convertible preferred stock and dividends (Socius Technology)

 

1,928

 

 

2,087

Stock options

 

3,216

 

 

3,546

Warrants

 

304

 

 

454

Unvested shares of restricted common stock

 

4,490

 

 

2,645

 

 

9,938

 

 

8,732


Financial Condition

As of March 31, 2011, we had working capital of approximately $0.8 million and an accumulated deficit of $71.8 million. The Company has incurred operating losses since and prior to the merger that created PositiveID.  The current operating losses are the result, in part, of the Company’s funding of its development products and projects:  the GlucoChip, the iglucose wireless communications system, the Easy Check breath analysis device, and the rapid flu detection system.  Operating losses are also due to salary costs, consulting fees, legal, accounting and other general and administrative costs. The Company expects its operating losses to continue through March 31, 2012.

Until we are able to achieve operating profits, it is our intention to continue to try to access the capital markets to fund the development of our HealthID products.  Since December 31, 2010 and from January 1, 2011 through March 31, 2011, we have raised $3.3 million and $1.4 million, respectively, under our Socius and Optimus financing facilities.  We also have $2.6 million of remaining capacity available under the amended Optimus agreement. Additionally, we currently have an effective “shelf” registration statement on Form S-3 which registers up to $9.6 million of securities. Under that registration statement, we have $3.9 million of availability remaining as of the date hereof. Because the aggregate market value of our common equity held by non-affiliates is less than $75 million, we may offer only up to one-third of the aggregate market value of our common equity held by non-affiliates less any amount sold under the registration statement during the prior 12 months. As such, the amount we may offer under the registration statement could be less at the time a sale is contemplated.


9




POSITIVEID CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(tabulated amounts in thousands of dollars, except per share amounts)


The Company believes that with its current working capital, its access to capital under its equity line agreement, and through either new capital raised under its shelf registration statement, and/or reducing and delaying certain research, development and related activities, that it will have sufficient funds available to meet its working capital requirements through March 31, 2012. There can be no assurances that it will be successful in negotiating 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.

Nasdaq Listing

On March 15, 2011, the Company received a letter from the Nasdaq staff  notifying the Company of a staff determination that the Company has not regained compliance with the $1.00 per share minimum bid price requirement set forth in the Rule and that based on the Company’s financial statement information as of September 30, 2010 (i.e., the date of the Company’s most recent periodic report filed with the SEC), it was not eligible, in accordance with Listing Rule 5810(c)(3)(A)(ii), for a second 180-calendar day cure period with respect to the bid price deficiency.  The Company requested a hearing on March 21, 2011, in accordance with applicable Listing Rules, and the hearing took place on April 28, 2011.  The filing of the appeal automatically stayed any delisting procedures until after the determination of the Nasdaq Hearings Panel (the "Panel"). At the hearing, the Company presented a plan to regain compliance to the Panel and requested that the Panel grant the Company an exception to Nasdaq’s continued listing standards for a sufficient period to implement that plan.   Under Listing Rule 5815(c)(1), the Panel has the discretion to grant such an exception for a period not to exceed 180 days, with the exception period commencing as of the date of the Nasdaq staff’s notification of the deficiency for which the exception is granted. There can be no assurance that the Panel will accept the Company’s compliance plan or grant the Company’s request for continued listing.  For more information, please see Item 1A., "Risk Factors," to this Quarterly Report on Form 10-Q.

2. Acquisitions

Easy Check Asset Purchase

On February 11, 2010, the Company purchased the assets of Easy Check, including the Easy Check breath analysis device and the iglucose wireless communication system. The Company issued 300,000 shares of common stock in connection with the purchase with a fair value of $351,000 based on a stock price of $1.71.  The entire purchase price was expensed as in-process research and development as the development of these projects had not yet reached technological feasibility and had no alternative future uses. In February 2011 the Company amended that agreement, paying the seller of the assets an additional 200,000 shares of its common stock valued at $114,000 and lowering the potential royalty on revenue from these products from 25% to 10%.

3. Financing Agreements

Optimus Financing

On September 29, 2009, the Company entered into a Convertible Preferred Stock Purchase Agreement (the “Purchase Agreement”) with Optimus Technology Capital Partners, LLC (“Optimus”) under which Optimus was committed to purchase up to $10 million shares of convertible Series A Preferred Stock of the Company (the “Preferred Stock”) in one or more tranches.

To facilitate the transactions contemplated by the Purchase Agreement, R & R Consulting Partners, LLC, a company controlled by Scott R. Silverman, the Company’s chairman and chief executive officer, loaned shares of common stock to Optimus equal to 135% of the aggregate purchase price for each tranche pursuant to Stock Loan Agreements between R & R Consulting Partners, LLC and Optimus. R & R Consulting Partners, LLC was paid $100 thousand fee in October 2009 plus will be paid 2% interest for the fair value of the loaned shares for entering into the stock loan arrangement. The aggregate amount of shares loaned under any and all Stock Loan Agreements, together with all other shares sold by or on behalf of the Company pursuant to General Instruction I.B.6. to Form S-3, cannot exceed one-third of the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Company in any 12 month period. R & R Consulting Partners, LLC may demand return of some or all of the borrowed shares (or an equal number of freely tradable shares of common stock) at any time on or after the six-month anniversary date such borrowed shares were loaned to Optimus, but no such demand may be made if there are any shares of Preferred Stock then outstanding. If a permitted return demand is made, Optimus is required to return the borrowed shares (or an equal number of freely tradable shares of common stock) within three trading days after such demand. Optimus may return the borrowed shares in whole or in part, at any time or from time to time, without penalty or premium. On September 29, 2009, October 8, 2009, and October 21, 2009, R & R Consulting Partners, LLC loaned Optimus 1.3 million, 800,000 and 600,000 shares, respectively, of Company common stock as is further discussed below.


10




POSITIVEID CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(tabulated amounts in thousands of dollars, except per share amounts)


Redemption of the Preferred Stock by the Company, to the extent such Preferred Stock shall not have been converted into shares of Common Stock, was mandatory in the event that the Company did not receive stockholder approval for the transactions described in the Purchase Agreement on or before March 31, 2010, which approval was obtained on November 10, 2009.

On September 29, 2009, the Company exercised the first tranche of this financing, to issue 296 shares of Series A Preferred Stock, for a tranche amount of approximately $3.0 million. In support of this tranche, R & R Consulting Partners, LLC loaned Optimus 1.3 million shares of common stock. This tranche closed on October 13, 2009, and the Company received proceeds of approximately $3.0 million, less the fees due on the entire financing commitment of $800 thousand. On November 5, 2009, the Company closed the second tranche of this financing, issuing 166 shares of Series A Preferred Stock, for a tranche amount of approximately $1.7 million. In support of this tranche, R & R Consulting Partners, LLC loaned Optimus approximately 1.4 million shares of common stock.

On May 12, 2010, R & R demanded the return of 2.7 million shares loaned to Optimus.  Also on May 12, 2010, the Company sent Optimus a notice of its election to convert all of the outstanding shares of Series A Preferred Stock into 2,729,452 shares of Company common stock.  Optimus returned these shares to R & R in repayment of the loan. The conversion of the Series A Preferred Stock was determined by a fixed conversion price that was determined at the time of the closings of the Preferred Stock which were approximately $3.07 and $1.60, respectively. The Company was required to issue make-whole shares to Optimus equal to 35% of the Series A Liquidation Value ($10,000 per share of Series A Preferred Stock) because the Preferred Stock was redeemed prior the first anniversary of the issuance date.  On October 13, 2010, the Company filed a Certificate of Elimination with the Secretary of State of the State of Delaware effecting the elimination of the Certificate of Designation of Preferences, Rights and Limitations of Series A Preferred Stock.  No shares of the Series A Preferred Stock remain outstanding.

On March 14, 2011, the Company entered into an Amended and Restated Convertible Preferred Stock Purchase Agreement (the “Amended Purchase Agreement”) with Optimus.   The Amended Purchase Agreement amends and restates the Purchase Agreement, and, among other things, specifically (i) replaces the Series A Preferred Stock issuable under the Purchase Agreement with a Series C Preferred Stock with substantially similar terms, and (ii) reduces the maximum amount of preferred stock issuable to Optimus under the Purchase Agreement from $10,000,000 to $8,700,000, of which $4,700,000 worth was already issued (in 2009) under the Purchase Agreement as described above.  

Under the terms of the Amended Purchase Agreement, from time to time and at the Company’s sole discretion, the Company can present Optimus with a notice to purchase shares of the Series C Preferred Stock (the “Notice”).   Optimus is obligated to purchase such Series C Preferred Stock on the twentieth trading day after any Notice date, subject to satisfaction of certain closing conditions, including (i) that the Company is listed for and trading on a trading market, (ii) the representations and warranties of the Company set forth in the Amended Purchase Agreement are true and correct as if made on each tranche date, and (iii) that no such purchase would result in Optimus and its affiliates beneficially owning more than 9.99% of the Company’s common stock. In the event the closing bid price of the Company’s common stock during any one or more of the nineteen trading days following the delivery of a Notice falls below 75% of the closing bid price on the trading day prior to the Notice date and Optimus determines not to complete the tranche closing, then the Company may, at its option, proceed to issue some or all of the applicable shares, provided that the conversion price for the Preferred Stock that is issued shall reset at the lowest closing bid price for such nine trading day period.  

On March 14, 2011, the Company delivered a Notice to Optimus to sell 140 shares of its Series C Preferred Stock for a tranche amount of approximately $1.4 million.   In support of this tranche, R & R loaned 2,729,452 shares, Mr. Silverman loaned 70,548 shares and Mr. Caragol loaned 700,000 shares of Company common stock to Optimus. On April 12, 2011 the tranche closed with the Company receiving the $1.4 million of proceeds, less $100,000 that was paid to Optimus to waive the requirement under the Amended Purchase Agreement that the conversion price of the Series C Preferred Stock issued in the tranche be reset at the lowest closing bid price for the 19 trading days following the the tranche notice date, which was March 14, 2011, due to the closing bid price of a share of the Company’s common stock falling below 75% during such 19 trading day period.

Certificate of Designations

On March 14, 2011, pursuant to the Amended Purchase Agreement, the Company filed a Certificate of Designations of Preferences, Rights and Limitations of Series C Preferred Stock with the Secretary of State of the State of Delaware.  The Company is authorized to issue 400 shares of Series C Preferred Stock and the shares of Preferred Stock may not be converted if the shares of common stock issuable upon conversion of the Series C Preferred Stock plus any shares previously issued to Optimus or its affiliates would exceed 19.99% of the common stock outstanding as calculated and determined in accordance with Nasdaq Marketplace rules.  


11




POSITIVEID CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(tabulated amounts in thousands of dollars, except per share amounts)


Ranking and Voting. The Preferred Stock ranks, with respect to rights upon liquidation, winding-up or dissolution, senior to the Company’s Common Stock and any other classes of stock or series of preferred stock of the Company, including the Series B Preferred Stock, and junior to existing and future indebtedness of the Company. Otherwise, holders of the Preferred Stock will not be entitled to receive dividends and will have no right to vote on any matters, questions or proceedings, including, without limitation, the election of directors.

Conversion. One or more shares of the Preferred Stock may be converted into shares of Common Stock of the Company, on or after the six month anniversary of the issuance date, at a conversion price equal to the closing bid price on the trading day immediately preceding the Notice date (the “Conversion Price”) by the Company or Optimus. If the Company or Optimus exercises this conversion option with respect to any Preferred Stock, the Company will issue to Optimus the number of shares of Common Stock equal to (x) $10,000 per share of Preferred Stock multiplied by (y) the number of shares of Preferred Stock subject to the Notice divided by (z) the Conversion Price with respect to such shares. If the Company exercises the conversion prior to the fourth anniversary of the issuance of such shares, then in addition to the conversion shares, the Company must pay to the holder additional shares with respect to such converted shares: (i) 35% of the conversion shares if converted after the six-month anniversary of the issuance date but prior to the first anniversary of the issuance date, (ii) 27% of the converted shares if converted on or after the first anniversary but prior to the second anniversary of the issuance date, (iii) 18% of the converted shares if converted on or after the second anniversary but prior to the third anniversary of the issuance date, and (iv) 9% of the converted shares if converted on or after the third anniversary but prior to the fourth anniversary of the issuance date.

Dividends and Other Distributions. Commencing on the first anniversary of the date of issuance of any such shares of Preferred Stock, holders of Preferred Stock shall be entitled to receive dividends on each outstanding shares of Preferred Stock, which shall accrue in shares of Preferred Stock at a rate equal to 10% per annum from the date of issuance. Accrued Dividends shall be payable annually on the anniversary of the Issuance Date. No dividend shall be payable with respect to shares of Series C Preferred Stock that are redeemed for cash or converted into shares of Common Stock prior to the first anniversary of the Issuance Date with respect to such shares.

Liquidation. Upon any liquidation, dissolution or winding up of the Company after payment or provision for payment of debts and other liabilities of the Company, before any distribution or payment is made to the holders of any other class or series of stock, the holders of Preferred Stock shall first be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount with respect to the Series C Liquidation Value, after which any remaining assets of the Company shall be distributed among the holders of the other class or series of stock in accordance with the Company’s Certificates of Designations and Certificate of Incorporation.

Redemption . The Company may redeem, for cash, any or all of the Preferred Stock at any time at the redemption price per share equal to $10,000 per share of Preferred Stock (the “Series C Liquidation Value”), plus any accrued but unpaid dividends with respect to such shares of Preferred Stock (the “Redemption Price”). If the Company exercises this redemption option with respect to any Preferred Stock prior to the fourth anniversary of the issuance of such Preferred Stock, then in addition to the Redemption Price, the Company must pay to Optimus a make-whole price per share equal to the following with respect to such redeemed Preferred Stock: (i) 35% of the Series C Liquidation Value if redeemed prior to the first anniversary of the issuance date, (ii) 27% of the Series C Liquidation Value if redeemed on or after the first anniversary but prior to the second anniversary of the issuance date, (iii) 18% of the Series C Liquidation Value if redeemed on or after the second anniversary but prior to the third anniversary of the issuance date, and (iv) 9% of the Series C Liquidation Value if redeemed on or after the third anniversary but prior to the fourth anniversary of the issuance date.

The Preferred Stock and Common Stock issuable upon conversion of the Series C Preferred Stock, if any, will not be or have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

Socius Financing

On April 28, 2010, the Company entered into a Preferred Stock Purchase Agreement (the “Preferred Purchase Agreement”) with Socius Capital Group, LLC doing business as Socius Technology Capital Group, LLC (“Socius Technology”) under which Socius Technology was committed to purchase up to $4.2 million in shares of non-convertible Series B Preferred Stock of the Company (the “Preferred Stock”) in one or more tranches (each a “Preferred Tranche”), at $10,000 per share of Preferred Stock. Under the terms of the Preferred Purchase Agreement, from time to time and at the Company’s sole discretion, the Company could present Socius Technology with a notice to purchase such Preferred Stock (the “Preferred Notice”). Socius Technology was obligated to purchase such Preferred Stock on the third trading day after the Preferred Notice date, subject to satisfaction of certain closing conditions, including (i) that the Company’s common stock is listed for and trading on a trading


12




POSITIVEID CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(tabulated amounts in thousands of dollars, except per share amounts)


market, (ii) the representations and warranties of the Company set forth in the Preferred Purchase Agreement are true and correct as if made on each Preferred Tranche date, and (iii) Socius Technology shall have received a commitment fee of $105,000 payable on the first tranche closing date (collectively, the “Closing Conditions”).

Commencing on the date of issuance of any such shares of Preferred Stock, holders of Preferred Stock were entitled to receive dividends on each outstanding share of Preferred Stock, which accrues in shares of Preferred Stock at a rate equal to 10% per annum from the date of issuance. Accrued dividends were be payable upon redemption of the Preferred Stock. As of March 31, 2011, the Company had accrued dividends of $249,000.

Stock Purchase Agreement

On April 28, 2010, the Company entered into a Stock Purchase Agreement (the “Agreement”) with Socius CG II, Ltd., a Bermuda exempted company (“Socius”) under which Socius was committed to purchase in connection with any Preferred Tranche, up to that number of shares of common stock equal in dollar amount to 100% of the applicable Preferred Tranche amount (the “Common Tranche”), at a per share price equal to the average of the individual daily volume weighted average price calculated over the ten trading days preceding the applicable tranche notice of the common stock on the date the Company provides notice of such tranche (the “Investment Price”). Under the Agreement, the Company also agreed to issue in connection with any Common Tranche, two-year warrants to purchase shares of common stock equal in dollar amount to 35% of the applicable Common Tranche, at an exercise price per share equal to the Investment Price.

Socius could pay the Investment Price for the common stock, at Socius’ option, in cash or a secured promissory note. Socius could pay the warrant exercise price, at Socius’ option, in cash, a secured promissory note, or, if applicable, by cashless exercise. The promissory note bears interest at 2.0% per year calculated on a simple interest basis. The entire principal balance and interest thereon was due and payable on the fourth anniversary of the date of the promissory note, but no payments were due so long as the Company was in default under the Preferred Purchase Agreement or the warrants or if there were any shares of Preferred Stock issued or outstanding. The promissory note was secured by the borrower’s right, title and interest in all outstanding shares of the Company’s common stock and other securities with a fair market value equal to the principal amount of the promissory note. The Company’s right to deliver a tranche notice to Socius pursuant to the Agreement was subject to the Closing Conditions and also that no purchase would result in Socius and its affiliates beneficially owning more than 9.99% of the common stock. Unless the Company obtained stockholder approval or Socius obtained an opinion of counsel that stockholder approval was not required, Socius could not exercise a warrant if, as a result of such exercise, the aggregate number of shares of common stock issued upon exercise of all warrants it held plus the aggregate number of shares of common stock issued under the Agreement would exceed 19.99% of the Company’s common stock outstanding.

Certificate of Designations

On April 28, 2010, the Company filed a Certificate of Designations of Preferences, Rights and Limitations of Series B Preferred Stock (the “Certificate of Designations”) with the Secretary of State of the State of Delaware. A summary of the Certificate of Designations is set forth below:

Ranking and Voting. The Preferred Stock ranks, with respect to rights upon liquidation, winding-up or dissolution, (i) senior to the Company’s Common Stock, and any other classes of stock or series of preferred stock of the Company except as set forth in clause (ii), and (ii) junior to the Company’s Series A Preferred Stock and all existing and future indebtedness of the Company. Holders of the Preferred Stock will not have rights to vote on any matters, questions or proceedings, including, without limitation, the election of directors.

Conversion. The Preferred Stock is not convertible into Common Stock.

Dividends and Other Distributions. Commencing on the date of issuance of any such shares of Preferred Stock, holders of Preferred Stock shall be entitled to receive dividends on each outstanding share of Preferred Stock, which shall accrue in shares of Preferred Stock at a rate equal to 10% per annum from the date of issuance. Accrued dividends shall be payable upon redemption of the Preferred Stock. However, so long as any shares of Series A Preferred Stock are outstanding, no dividends or other distributions may be paid, declared or set apart with respect to the Preferred Stock.


13




POSITIVEID CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(tabulated amounts in thousands of dollars, except per share amounts)


Liquidation. Upon any liquidation, dissolution or winding up of the Company after payment or provision for payment of debts and other liabilities of the Company and any liquidation preferences to the senior securities, before any distribution or payment is made to the holders of any junior securities, the holders of Preferred Stock shall first be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount with respect to the Series B Liquidation Value, as defined below, after which any remaining assets of the Company shall be distributed among the holders of the other class or series of stock in accordance with the Company’s Certificates of Designations and Certificate of Incorporation.

Redemption . The Company may redeem, for cash or by an offset against any outstanding note payable from Socius to the Company that was issued by Socius, any or all of the Preferred Stock at any time at the redemption price per share equal to $10,000 per share of Preferred Stock (the “Series B Liquidation Value”), plus any accrued but unpaid dividends with respect to such shares of Preferred Stock (the “Redemption Price”). If the Company exercises this redemption option with respect to any Preferred Stock prior to the fourth anniversary of the issuance of such Preferred Stock, then in addition to the Redemption Price, the Company must pay to Socius a make-whole price per share equal to the following with respect to such redeemed Preferred Stock: (i) 35% of the Series B Liquidation Value if redeemed prior to the first anniversary of the issuance date, (ii) 27% of the Series B Liquidation Value if redeemed on or after the first anniversary but prior to the second anniversary of the issuance date, (iii) 18% of the Series B Liquidation Value if redeemed on or after the second anniversary but prior to the third anniversary of the issuance date, and (iv) 9% of the Series B Liquidation Value if redeemed on or after the third anniversary but prior to the fourth anniversary of the issuance date.

The Preferred Stock was not registered under the Securities Act of 1933 and could not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

Tranche Draw Down

On April 29, 2010, the Company presented Socius Technology with a Preferred Notice to purchase $2.3 million of Preferred Stock in a Preferred Tranche. Upon the closing of the Preferred Tranche, which occurred on May 4, 2010, the Company issued 230 shares of Preferred Stock. In connection with the Preferred Notice, the Company also presented Socius with a notice to purchase $2.3 million of common stock and warrants to purchase 600,746 shares of common stock. The Company issued 1,716,417 shares of common stock at an Investment Price per share of $1.34, paid in the form a secured promissory note, and a warrant to purchase 600,746 shares of common stock to Socius, at an exercise price equal to the Investment Price of $1.34, which warrant Socius exercised on April 29, 2010 and paid in the form of a secured promissory note.  There was no beneficial conversion feature as the fair value of the secured promissory notes approximated the fair value of the common stock and warrants issued on the date of issuance.  The promissory note is secured by the shares of Preferred Stock issued to Socius.

On January 13, 2011, we presented Socius Technology with a Preferred Notice to purchase $1.7 million of Preferred Stock in a Preferred Tranche.  Upon the closing of the Preferred Tranche, we issued 168 shares of Preferred Stock. In connection with the Preferred Notice we also presented Socius  with a notice to purchase $1.7 million in shares of our common stock at an Investment Price of $0.69 per share, for a total of 2,434,783 shares of our common stock pursuant to the Agreement.  On the same date, we issued Socius a two-year warrant to purchase 852,174 shares of our common stock, which is equal in dollar amount to 35% of the applicable tranche amount, at an exercise price per share equal to the Investment Price.  Socius may pay the warrant exercise price, at Socius' option, in cash, a secured promissory note, or, if applicable, by cashless exercise.  Socius elected to pay the warrant exercise price by a secured promissory note.  The promissory note is secured by the shares of Preferred Stock issued to Socius.

On January 28, 2011, we presented Socius Technology with a Preferred Notice to purchase $0.2 million of Preferred Stock in a Preferred Tranche.  Upon the closing of the Preferred Tranche, we issued 22 shares of Preferred Stock. In connection with the Preferred Notice, we also presented Socius with a notice to purchase $0.2 million in shares of our common stock at an Investment Price of $0.77 per share, for a total of 285,714 shares of our common stock pursuant to the Agreement.  On the same date, we issued Socius a two-year warrant to purchase 100,000 shares of our common stock, which is equal in dollar amount to 35% of the applicable tranche amount, at an exercise price per share equal to the Investment Price.  Socius may pay the warrant exercise price, at Socius' option, in cash, a secured promissory note, or, if applicable, by cashless exercise.  Socius elected to pay the warrant exercise price by a secured promissory note. The promissory note was secured by the shares of Preferred Stock issued to Socius.


14




POSITIVEID CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(tabulated amounts in thousands of dollars, except per share amounts)


On May 11, 2011, the Company presented Socius with a notice of redemption of the 420 shares of Series B Preferred Stock held by Socius for a price of $4.2 million and a premium for early redemption of $1.3 million. The consideration was paid by offset against the promissory notes which are equal to the value of the Preferred Stock held by the Company and any accrued dividends due and owing on the shares redeemed. Thus, as of May 11, 2011, the Company has no shares of Series B Preferred Stock outstanding.

4. Stockholders’ Equity

Stock Option Plans

In April 2002, the Company’s Board of Directors approved the VeriChip Corporation 2002 Flexible Stock Plan (the “VeriChip 2002 Plan”). Under the VeriChip 2002 Plan, the number of shares for which options, SARs or performance shares may be granted is approximately 2.0 million. As of December 31, 2010, approximately 2.0 million options and restricted shares, net of forfeitures, have been granted to directors, officers and employees under the VeriChip 2002 Plan, and 0.3 million of the options or shares granted were outstanding as of December 31, 2010. All the outstanding options are fully vested and do not expire until seven to nine years from the vesting date. As of December 31, 2010, no SARs have been granted and 441 shares may still be granted under the VeriChip 2002 Plan.

On April 27, 2005, the Company’s Board of Directors approved the VeriChip Corporation 2005 Flexible Stock Plan (the “VeriChip 2005 Plan”). Under the VeriChip 2005 Plan, the number of shares for which options, SARs or performance shares may be granted is approximately 0.3 million. As of December 31, 2010, approximately 0.3 million options and shares have been granted under the VeriChip 2005 Plan. All of the options are fully vested and do not expire until nine years from the vesting date. As of December 31, 2010, no SARs have been granted and 832 shares may still be granted under the VeriChip 2005 Plan.

On June 17, 2007, the Company adopted the VeriChip 2007 Stock Incentive Plan, which was amended and restated on December 16, 2008 (the “VeriChip 2007 Plan”). Under the VeriChip 2007 Plan, the number of shares for which options, restricted shares, SARs or performance shares may be granted is 3.0 million. As of December 31, 2010, approximately 3.0 million options and shares have been granted under the VeriChip 2007 Plan. As of December 31, 2010, no SARs have been granted and 2,962 shares may be granted under the VeriChip 2007 Plan.

On November 10, 2009, the Company adopted the VeriChip 2009 Stock Incentive Plan (the “VeriChip 2009 Plan”). Under the VeriChip 2009 Plan, the number of shares for which options, SARs or performance shares may be granted is 8.0 million. As of December 31, 2010, approximately 6.4 million options and shares have been granted under the VeriChip 2009 Plan. As of December 31, 2010, no SARs have been granted and 1.6 million shares may be granted under the VeriChip 2009 Plan.

In addition, as of  March 31, 2011, 0.3 million options to purchase the Company’s common stock have been granted outside of the Company’s plans that remain outstanding. These options were granted at exercise prices ranging from $0.23 to $8.55 per share, are fully vested and are exercisable for a period from seven to nine years.

At the effective time of the Merger, the Company assumed all of Steel Vault’s obligations under the SysComm International Corporation 2001 Flexible Stock Plan, as amended and restated, and each option outstanding thereunder, provided that the obligation to issue shares of the Company’s stock, as adjusted to reflect the exchange ratio set forth in the Merger Agreement, was substituted for the obligation to issue shares of Steel Vault common stock.

On November 10, 2009, pursuant to the Steel Vault Merger, approximately 6.7 million outstanding Steel Vault options were converted into 3.3 million Company options. These options were granted at exercise prices ranging from $0.36 to $2.00 per share, are fully vested and are exercisable for a period up to ten years from the vesting date.

A summary of option activity under the Company’s option plans as of March 31, 2010 and 2011, and changes during the three months then ended is presented below:


15




POSITIVEID CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(tabulated amounts in thousands of dollars, except per share amounts)


 

 

 

 

 

 

Weighted Average

 

 

 

Number of

 

 

Exercise Price

 

 

 

Options

 

 

Per Share

 

Outstanding on January 1, 2010

 

 

4,215

 

 

$

1.73

 

Granted

 

 

 

 

 

 

Exercised

 

 

(632)

 

 

 

0.50

 

Forfeited

 

 

(37)

 

 

 

0.28

 

 

 

 

 

 

 

 

 

Outstanding on March 31, 2010

 

 

3,546

 

 

 

1.97

 

 

 

 

 

 

 

 

 

Exercisable on March 31, 2010 (1)

 

 

3,440

 

 

 

2.02

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

Weighted Average

 

 

 

Number of

 

 

Exercise Price

 

 

 

Options

 

 

Per Share

 

Outstanding on January 1, 2011

 

 

3,216

 

 

$

2.03

 

Granted

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding on March 31, 2011

 

 

3,216

 

 

 

2.03

 

 

 

 

 

 

 

 

 

Exercisable on March 31, 2011 (1)

 

 

3,103

 

 

 

2.07

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares available on March 31, 2011 for options and common shares that may be granted

 

 

1,294

 

 

 

 

 


(1)   The intrinsic value of a stock option is the amount by which the fair value of the underlying stock exceeds the exercise price of the option. Based upon the Company’s closing price on the NASDAQ, the fair value of the underlying stock was $0.42 at March 31, 2011. As of March 31, 2011, the aggregate intrinsic value of all options outstanding was $57,000.


There were no options exercised during quarter ended March 31, 2011.


The following table summarizes information about stock options at March 31, 2011:


 

 

Outstanding Stock Options

 

 

Exercisable Stock Options

 

 

 

 

 

 

 

Weighted-

 

 

Weighted-

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Remaining

 

 

Exercise

 

 

 

 

 

 

Exercise

 

Range of

 

 

 

 

 

Contractual

 

 

Price Per

 

 

 

 

 

 

Price Per

 

Exercise Prices

 

Shares

 

 

Life (years)

 

 

Share

 

 

Shares

 

 

Share

 

$0.00 to $0.36

 

 

829

 

 

 

8.19

 

 

$

0.36

 

 

 

829

 

 

$

0.36

 

$0.37 to $0.62

 

 

1,106

 

 

 

5.35

 

 

 

0.47

 

 

 

1,052

 

 

 

0.45

 

$0.68 to $1.99

 

 

503

 

 

 

3.07

 

 

 

0.87

 

 

 

444

 

 

 

0.70

 

$2.00 to $5.75

 

 

349

 

 

 

5.86

 

 

 

5.59

 

 

 

349

 

 

 

5.59

 

Above $5.75

 

 

429

 

 

 

3.34

 

 

 

7.78

 

 

 

429

 

 

 

7.78

 

 

 

 

3,216

 

 

 

5.51

 

 

$

2.03

 

 

 

3,103

 

 

$

2.07

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



16




POSITIVEID CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(tabulated amounts in thousands of dollars, except per share amounts)


A summary of restricted stock outstanding as of March 31, 2010 and 2011 and changes during the three months then ended is presented below:


 

 

2010

 

2011

Unvested at January 1

 

4,192

 

 

6,623

Issued

 

420

 

 

710

Vested

 

(1,967)

 

 

(2,843)

Forfeited or Expired

 

 

 

Unvested at March 31

 

2,645

 

 

4,490


There are inherent uncertainties in making estimates about forecasts of future operating results and identifying comparable companies and transactions that may be indicative of the fair value of the Company’s securities. The Company believes that the estimates of the fair value of its common stock at each option grant date were reasonable under the circumstances.


The Black-Scholes model, which the Company used to determine compensation expense, required 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.


Our 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. Our computation of volatility is based on the historical volatility of our common stock.

Warrants

On November 10, 2009, pursuant to the Steel Vault Merger, all outstanding Steel Vault warrants were converted into approximately 0.3 million Company warrants. These warrants were granted at exercise prices ranging from $0.60 to $0.88 per share, are fully vested and are exercisable for a period from five to ten years from the vest date. In December 2010, 0.2 million of those warrants expired; the remaining 0.3 million warrants expire in 2014.

Share-Based Compensation

The Company recorded compensation expense, related to stock options and restricted shares, of approximately $0.9 million and $1.1 million for the three months ended March 31, 2011 and 2010, respectively.

The Company recorded compensation expense associated with the 40,000 options granted in December 2008 to consultants using the variable accounting method which requires the Company to re-measure the compensation expense associated with these options at the end of each reporting period until the options are vested. Accordingly, the Company reduced the compensation expense recorded in connection with these options by approximately $3,800 for the three months ended March 31, 2011.  

In September and October 2009, the Company granted an aggregate of approximately 350,000 shares of its restricted common stock to a research and development partner. The Company recorded research and development expense associated with the restricted stock using the variable accounting method that requires the Company to re-measure the compensation expense associated with the restricted stock at the end of each reporting period until the restricted stock is vested. Research and development expense recorded in connection with the restricted stock for the three months ended March 31, 2010 was approximately $162,000. The shares were fully vested as of March 31, 2010.  


17




POSITIVEID CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(tabulated amounts in thousands of dollars, except per share amounts)


In November and December 2009, the Company granted approximately 475,000 shares of common stock: 50,000 to an employee and 425,000 to consultants. These shares vested between January 1, 2010 and 2011.

The Company determined the fair value of the 50,000 shares issued to the employee to be approximately $83,000 based on the closing price of the Company’s common stock on the date of grant. The fair value of the grant will be recognized as compensation expense over the vesting period. Accordingly, the Company recognized approximately $2,000 in compensation expense for the three months ended March 31, 2011 in connection with this grant. The shares were fully vested as of March 31, 2011.  

The Company recorded compensation expense associated with the 425,000 shares issued to consultants using the variable accounting method that requires the Company to re-measure the compensation expense associated with these shares at the end of each reporting period until the shares are vested. Compensation expense recorded in connection with the shares as of March 31, 2011 was approximately $10,000. The shares were fully vested as of January 31, 2011.  

In November 2009, the Company granted 2.0 million shares of its restricted common stock to its executive officers which vest on a pro-rata basis through 2012. The Company determined the value of the stock to be $3.3 million based on the value of its common stock on the dates of grant. The value of the outstanding restricted stock is being amortized as compensation expense over the vesting period. The Company recorded compensation expense of approximately $194,000 in the three months ended March 31, 2011 associated with this restricted stock and 50% of the shares were fully vested as of January 31, 2011.

In January 2010, the Company granted 50,000 shares of its common stock to a consultant from the VeriChip 2002 Plan. The Company determined the value of the stock to be approximately $56,000 based on the value of its common stock on the dates of grant and recorded the full amount as compensation expense in the three months ended March 31, 2010.

In January 2010, the Company granted 100,000 shares of its common stock to an employee from the VeriChip 2007 Plan, 50% of which vested immediately and the other 50% of which vested on July 1, 2010. The Company determined the value of the stock to be approximately $109,000 based on the value of its common stock on the dates of grant. The Company recorded compensation expense of approximately $78,000 in the three months ended March 31, 2010 associated with this restricted stock.

In January 2010, the Company granted 385,000 shares of its common stock to members of its Board of Directors of which 370,000 shares were restricted, vesting on January 1, 2011. The Company determined the value of the stock to be approximately $420,000 based on the value of its common stock on the dates of grant. The value of the outstanding restricted stock was amortized as compensation expense over the vesting period. The Company recorded compensation expense of approximately $1,000 in the three months ended March 31, 2011 associated with this stock.

In February 2010, the Company authorized the grant of 50,000 shares of its common stock to a consultant. The Company determined the value of the stock to be approximately $70,000 based on the value of its common stock on the dates of grant and recorded the full amount as compensation expense in the three months ended March 31, 2010.

In February and April 2010, the Company granted an aggregate of approximately 290,000 shares of its restricted common stock to a research and development partner, Receptors. Such restricted shares vested over the periods of performance between February and September 2010. The Company recorded research and development expense associated with the restricted stock using the variable accounting method that requires the Company to re-measure the compensation expense associated with the restricted stock at the end of each reporting period until the restricted stock is vested. The Company recorded the full compensation expense of approximately $310,000 over the vesting period.

In April 2010, the Company issued options exercisable for approximately 60,000 shares of common stock to employees, vesting between 2011 and 2012. The Company determined the fair value of the options to be $66,000 on the date of grant based on an estimate of the fair value using the Black-Scholes valuation model as described above. The fair value of the grant is being recognized as compensation expense over the vesting period. Accordingly, the compensation expense recorded in connection with these options was approximately $9,600 for the three months ended March 31, 2011.

In April 2010, the Company granted 16,000 shares of its common stock to a consultant who will provide government affairs services from the Company’s authorized/unissued reserve. The Company determined the value of the stock to be approximately $23,000 based on the value of its common stock on the dates of grant, and recorded the full amount as compensation for the fully vested shares.


18




POSITIVEID CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(tabulated amounts in thousands of dollars, except per share amounts)


In April and May 2010, the Company granted an aggregate of approximately 1.4 million shares of its common stock to its employees, including the Company’s chairman and chief executive officer and its president and chief financial officer.  These executives agreed to receive stock based compensation in lieu of cash for salary and a portion of their incentive compensation for the remainder of 2010. The Company determined the value of the stock to be approximately $1.9 million based on the value of its common stock on the dates of grant. The value of the outstanding restricted stock was amortized as compensation expense over the vesting period, between January 1, 2011 and 2012. Compensation expense recorded in connection with the restricted stock for the three months ended March 31, 2011 was $183,956.

In June 2010, the Company extended previously fully vested options set to expire on June 28, 2010 for one year for 175,000 shares for its chief executive officer. The Company recorded compensation expense of $23,000 related to the extension.

In July 2010, the Company granted 50,000 shares of its common stock to an employee, 50% of which will vest in July 2011 and the other 50% of which will vest in July 2012. The Company determined the value of the stock to be approximately $51,000 based on the value of its common stock on the dates of grant. The Company recorded compensation expense of approximately $9,000 for the three months ended March 31, 2011 associated with this restricted stock.

In July and September 2010, the Company granted 85,500 shares from the VeriChip 2009 Plan and 37,500 shares from the Company’s authorized/unissued reserve to several consultants. The Company determined the value of the stock based on the value of its common stock on the dates of grant. The Company recorded the full compensation expense of approximately $108,000 associated with this fully vested stock.

In November 2010, the Company granted approximately 1.8 million shares of its common stock to its chairman and chief executive officer and its president and chief financial officer, vesting 50% on January 1, 2012 and 2013.   The Company determined the value of the stock to be approximately $1.1 million based on the value of its common stock on the dates of grant. The value of the outstanding restricted stock was amortized as compensation expense over the vesting period. Compensation expense recorded in connection with the restricted stock was approximately $140,000 for the three months ended March 31, 2011.

In December 2010, the Company granted approximately 125,000 shares of its restricted common stock to Receptors, a research and development company. Such shares were fully vested at the time of grant. The Company determined the value of the stock to be approximately $69,000 based on the value of its common stock on the date of grant and recorded the full amount as compensation expense in December 2010.

In December 2010, the Company granted approximately 0.9 million shares of its common stock to its employees and directors.  The Company determined the value of the stock to be approximately $0.5 million based on the value of its common stock on the dates of grant. The value of the outstanding restricted stock is amortized as compensation expense over the vesting period through January 1, 2012. Compensation expense recorded in connection with the restricted stock for the three months ended March 31, 2011 was $176,000.

In February 2011, the Company authorized the grant of 220,000 restricted shares of its common stock to a member of its Board of Director of which, 200,000 shares will vest on January 2012 and 20,000 shares will vest on December 2011. The Company determined the value of the stock to be approximately $121,000 based on the value of its common stock on the dates of grant. The value of the outstanding restricted stock is amortized as compensation expense over the vesting period. The Company recorded compensation expense of approximately $25,460 in the three months ended March 31, 2011 associated with this stock.

In February 2011, the Company authorized the grant of 125,000 shares of its common stock to a consultant. The Company determined the value of the stock to be approximately $71,250 based on the value of its common stock on the date of grant and recorded the full amount as compensation expense in the three months ended March 31, 2011.

In February 2011, the Company authorized the grant of 200,000 shares of its common stock to Easy Check Medical Diagnostics, LLC. The Company determined the value of the stock to be approximately $114,000 based on the value of its common stock on the date of grant and recorded the full amount as research and development expense in the three months ended March 31, 2011.

In March 2011, the Company authorized the grant of 65,000 shares of its common stock to a consultant. The Company determined the value of the stock to be approximately $30,550 based on the value of its common stock on the dates of grant and recorded the full amount as an expense in the three months ended March 31, 2011.


19




POSITIVEID CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(tabulated amounts in thousands of dollars, except per share amounts)


In March 2011, the Company authorized the grant of 100,000 shares of its common stock to an employee. The Company determined the value of the stock to be approximately $47,000 based on the value of its common stock on the dates of grant and recorded the full amount as compensation expense in the three months ended March 31, 2011.

5. Income Taxes

The Company had an effective tax rate of nil for the three months ended March 31, 2011 and 2010. The Company incurred losses before taxes for the three months ended March 31, 2011 and 2010. However, it has not recorded a tax benefit for the resulting U.S. net operating loss carryforwards, as the Company has determined that a valuation allowance against its net U.S. deferred tax assets was appropriate based primarily on its historical operating results.

In January 2010, Stanley Canada Corporation, or Stanley, received a notice from the Canadian Revenue Agency (CRA), that the CRA would be performing a review of Xmark’s Canadian tax returns for the periods 2005 through 2008. The Company has complied with all of Stanley’s information requests. This review covers all periods that the Company owned Xmark. 

In February 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.  The Company does not agree with the position taken by the CRA and intends to dispute such findings.  Based on the Company’s review of the correspondence and evaluation of the supporting detail, it does not believe that the ultimate resolution of this dispute will have a material negative impact on the Company’s historical tax liabilities, its current financial position or results of operations. The Company believes that as of March 31, 2011, it has adequately accrued for this dispute.

The Company recognizes any interest accrued related to unrecognized tax benefits or exposures in interest expense and penalties in operating expenses. During the three months ended March 31, 2011 and 2010, there was no such interest or penalties.

6. Legal Proceedings

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

7. Related Party Transactions

As of  March 31, 2011, Mr. Silverman beneficially owned 26.9 % of the Company’s outstanding common stock, including the 1,035,000 shares and 54,000 shares underlying a warrant that are directly owned by Blue Moon Energy Partners, LLC (“Blue Moon”) and 4,785,008 shares that are directly owned by R & R.  Mr. Silverman, the Company’s chief executive officer and chairman of the Board of Directors, is a manager and controls a member of Blue Moon (i.e., R & R). William J. Caragol, the Company’s president, chief financial officer and member of the Board of Directors, is a manager and member of Blue Moon.

Optimus Financing

On March 14, 2011, the Company entered into an Amended and Restated Convertible Preferred Stock Purchase Agreement with Optimus.  To facilitate the transactions contemplated thereby, R & R Consulting Partners, LLC, and Messrs. Silverman and Caragol loaned shares of common stock to Optimus.  For more information regarding this transaction, see Note 3, “Financing Agreements,” to these condensed consolidated financial statements.


20




POSITIVEID CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(tabulated amounts in thousands of dollars, except per share amounts)


8. Segments

The Company operates in two business segments: HealthID and ID Security.

HealthID Segment

Our HealthID segment is currently focused on the development of four products: (1) the GlucoChip, a glucose-sensing microchip, based on our proprietary intellectual property which is being developed in conjunction with Receptors LLC (“Receptors”), (2) iglucose TM , a stand-alone, self-contained unit that automatically queries a diabetic user’s date-capable glucometer for blood glucose data and sends that data via encrypted text messaging to the iglucose online database, (3) Easy Check TM , a non-invasive breath glucose detection system, based on the correlation of acetone in exhaled breath to blood glucose levels, and (4) the rapid flu detection system, also being developed in conjunction with Receptors..

Our HealthID segment also includes the VeriMed system, which uses an implantable passive RFID microchip (the “VeriChip”) that is used in patient identification applications. Each implantable microchip contains a unique verification number that is read when it is scanned by our scanner. We are not actively marketing the VeriMed system.

ID Security Segment

Our ID Security segment includes our Identity Security suite of products, sold through our NationalCreditReport.com brand and our Health Link personal health record (“PHR”) business. Our NationalCreditReport.com business offers consumers a variety of identity security products and services primarily on a subscription basis. These services help consumers protect themselves against identity theft or fraud and understand and monitor their credit profiles and other personal information, which include credit reports, credit monitoring and credit scores. In the first quarter of 2010, the company re-launched its Health Link PHR business. The Company focuses its marketing efforts on partnering with health care providers and exchanges, physicians group, Electronic Medical Record (“EMR”) system vendors, and insurers to use Health Link as PHR provided to their patients.

Beginning in early 2011, in conjunction with our focus on our HealthID businesses, including the development of the GlucoChip, the Easy Check breath glucose detection system, and iglucose wireless communication system, we have limited our activities in our ID Security segment.  In early 2011, we ceased acquiring new subscribers to our identity security and credit reporting businesses. We intend to continue to explore potential strategic transactions with third parties in the healthcare, identification, animal health, and other sectors.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on segment income as presented below.

The following is selected segment data as of and for the period ended:


 

 

 

 

 

 

 

 

 

 

Total From

 

 

 

Health

 

 

ID

 

 

Continuing

 

 

 

ID

 

 

Security

 

 

Operations

 

As of and For the Three Months Ended March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

5

 

 

$

588

 

 

$

593

 

Operating income (loss)

 

 

(2,468

)

 

 

188

 

 

 

(2,280

)

Income (loss) from continuing operations before income taxes

 

 

(2,402

)

 

 

188

 

 

 

(2,214

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,997

 

 

$

1,752

 

 

$

3,749

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total From

 

 

 

Health

 

 

ID

 

 

Continuing

 

 

 

ID

 

 

Security

 

 

Operations

 

As of and For the Three Months Ended March 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

75

 

 

$

598

 

 

$

673

 

Operating loss

 

 

(2,695

)

 

 

(1,166

)

 

 

(3,861

)

Loss from continuing operations before income taxes

 

 

(2,683

)

 

 

(1,163

)

 

 

(3,846

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets of continuing operations

 

$

4,902

 

 

$

4,099

 

 

$

9,001

 



21




POSITIVEID CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(tabulated amounts in thousands of dollars, except per share amounts)



9. Supplementary Cash Flow Information

In the three months ended March 31, 2011 and 2010, the Company had the following non-cash investing and financing activities:


 

 

Three Months Ended

 

 

March 31,

 

 

2011

 

 

2010

Non-cash financing and investing activities:

 

 

 

 

 

 

 

Accrued dividend payable

 

 $

96

 

 

 $

114

Issuance of common stock for Easy Check asset acquisition

 

 

114

 

 

 

351

Issuance of common stock for Socius note receivable

 

 

1,900

 

 

 

 

 

 

 

 

 

 

 

$

2,110

 

 

$

465


10. Subsequent Events

MicroFluidic Systems Stock Purchase Agreement

On May 9, 2011, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with, MicoFluidic Systems, a California corporation (“MicroFluidic”), and its stockholders, pursuant to which all of the outstanding capital stock of MicroFluidic will be acquired by the Company (the “Acquisition”).  

MicroFluidic, founded in 2001, specializes in the production of automated instruments for a wide range of applications in the detection and processing of biological samples, ranging from rapid medical testing to airborne pathogen detection for homeland security.  MicroFluidic has received in the last 10 years over $45 million in government contracts, the majority of which have come from the Department of Homeland Security. MicroFluidic has a strong intellectual property portfolio, with 12 U.S. Patents granted, 17 U.S. Patents pending, six patent applications in Canada, six patent applications in Europe and four patent applications in Japan.

As consideration for the consummation of the Acquisition, the Company will pay $250,000 to fund certain accounts payable of MicroFluidic, and within five business days from the Acquisition, must (i) issue shares of Company common stock, par value $0.01 per share (“Shares”), equal to $500,000 divided by the price per Share equal to an average of the individual daily volume-weighted average price over the ten trading days preceding the applicable issuance date (the “VWAP Price”) to two of the Sellers in exchange for the cancellation of loans made to MicroFluidic; and (ii) issue Shares pro rata to the Sellers equal to $450,000 divided by the VWAP Price (collectively, the “Stock Consideration”).

In connection with the Acquisition, the Company is also required to make certain earn-out payments, up to a maximum of $7 million in Shares at the applicable VWAP Price (the “Earn-Out Shares”), upon certain conditions over the next three years (the “Earn-Out Payment”); provided, however, that the Company is prohibited from making any Earn-Out Payment until stockholder approval is obtained if the aggregate number of Shares to be issued, under the Nasdaq Marketplace  rules, exceed 19.99% of the Company’s common stock outstanding immediately prior to the closing.

The Acquisition is not subject to any financing conditions and remains subject to customary conditions, including, agreements by the Company (1) to cause MicoFluidic to conduct its operations according to its ordinary course of business, (2) to cause MicroFluidic to refrain from certain actions between the time of signing the Purchase Agreement and the closing of the Acquisition, and (3) to cause MicoFluidic to use its reasonable efforts to keep all contracts in full force and effect.

The parties have made customary representations and warranties in the Purchase Agreement and agreed to certain customary covenants, including their authority to enter into the Purchase Agreement, the organization of each of the parties and the lack of conflict with any organizational documents, agreements or rules. These representations and warranties were made as of specific dates and may be subject to important qualifications, limitations and supplemental information agreed to in negotiating the terms of the Purchase Agreement.


22




POSITIVEID CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(tabulated amounts in thousands of dollars, except per share amounts)


The Company agreed to issue the Stock Consideration and the Earn-Out Shares in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. The information disclosed under Item 1.01 is incorporated into this Item 3.02 in its entirety.

Socius Notice of Redemption

On May 11, 2011, the Company presented Socius with a notice of redemption of the 420 shares of Series B Preferred Stock held by Socius for a price of $4.2 million and a premium for early redemption of $1.3 million. The consideration was paid by offset against the promissory notes held by the Company and any dividends due and owing on the shares redeemed. Thus, as of May 11, 2011, the Company has no shares of Series B Preferred Stock outstanding.


23




Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, 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:


·

that we intend to continue to explore strategic transactions with third parties in the healthcare, identification, animal health, and other sectors;

·

that we anticipate our revenues from our identity security and credit reporting businesses to decline significantly from 2010 amounts and related costs to acquire subscribers to decline accordingly;

·

that we may continue to recruit and sell customer acquisitions from our identity security and credit reporting businesses to third parties;

·

that based on the Company’s review of the correspondence and evaluation of the supporting detail involving the Canada Revenue Agency audit, it does not believe that the ultimate resolution of this dispute will have a material negative impact on the Company’s historical tax liabilities, its current financial position or results of operations;

·

the expectation that operating losses will continue during the next twelve months, and that until we are able to achieve profits, we intend to continue to try to access the capital markets to fund the development of our HealthID products;

·

the expectation that our device partner will receive FDA clearance for their device in the second half of 2011 and that they will begin ordering transponder chips from the Company in fulfillment of their $3 million, five-year commitment;

·

that the Company seeks to structure its research and development expenses on a project basis to allow management of costs and results on a discreet 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 the Company to minimize its firm fixed commitments at any given point in time; and

·

that we believe that with our current working capital, our access to capital under our equity line agreement, and through either new capital raised under our shelf registration statement, and/or reducing and delaying certain research, development and related activities, that we will have sufficient funds available to meet our working capital requirements over the next twelve months.


This Quarterly Report on Form 10-Q also contains forward-looking statements attributed to third parties relating to their estimates regarding the size of the future market for products and systems such as our products and systems, and the assumptions underlying such estimates. Forward-looking statements include all statements that are not historical facts and can be identified by forward-looking statements such as “may,” “might,” “should,” “could,” “will,” “intends,” “estimates,” “predicts,” “projects,” “potential,” “continue,” “believes,” “anticipates,” “plans,” “expects” and similar expressions. Forward-looking statements are only predictions based on our current expectations and projections, or those of third parties, about future events and involve risks and uncertainties.

Although we believe that the expectations reflected in the forward-looking statements contained in this Quarterly Report on Form 10-Q are based upon reasonable assumptions, no assurance can be given that such expectations will be attained or that any deviations will not be material. In light of these risks, uncertainties and assumptions, the forward-looking statements, events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Important factors that could cause our actual results, level of performance or achievements to differ materially from those expressed or forecasted in, or implied by, the forward-looking statements we make in this Quarterly Report on Form 10-Q are discussed under “Item 1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2010 and include:


·

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 the Rapid Flu Detection System, the GlucoChip glucose-sensing microchip, the Easy Check breath glucose detection system and the iglucose wireless communication system;



24





·

our ability to complete the Phase II of the Rapid Flu Detection System and Phase II of the glucose-sensing microchip development program;

·

our ability to pursue our strategy to offer identification tools and technologies for consumers and businesses;

·

our ability to maximize the amount of capital that we will have available to pursue business opportunities in the healthcare sector;

·

our ability to successfully develop and commercialize the Easy Check breath glucose detection system and the iglucose wireless communication device and the glucose-sensing microchip, and the market acceptance of these devices and the microchip;

·

our ability to obtain patents on our products, including the Easy Check breath glucose detection system and the iglucose wireless communication device, the validity, scope and enforceability of our patents, and the protection afforded by our patents;

·

we may become subject to 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;

·

our ability to continue listing our common stock on the Nasdaq Stock Market;

·

the potential for patent infringement claims to be brought against us asserting that we hold no rights for the use of the implantable microchip technology and that we are violating another party’s intellectual property rights. If such a claim is successful, we could be enjoined from engaging in activities to market the systems that utilize the implantable microchip and be required to pay substantial damages;

·

our ability to provide uninterrupted, secure access to the Health Link, NationalCreditReport and VeriMed databases;

·

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

·

our ability to close the transactions contemplated by the Stock Purchase Agreement for the acquisition of MicroFluidic Systems.


You should not place undue reliance on any forward-looking statements. In addition, past financial or operating performance is not necessarily a reliable indicator of future performance, and you should not use our historical performance to anticipate future results or future period trends. Except as otherwise required by federal securities laws, we disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based. All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q and under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010. These are factors that could cause our actual results to differ materially from expected results. Other factors besides those listed could also adversely affect us.


25




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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q as well as our Annual Report on Form 10-K for the year ended December 31, 2010.

Overview

We have historically developed, marketed and sold radio frequency identification, frequently referred to as RFID, systems used for the identification of people in the healthcare market. Beginning in the fourth quarter of 2009, with the acquisition of Steel Vault Corporation (“Steel Vault”), we focused our strategy to provide unique health and security identification tools to protect consumers and businesses, operating in two key segments: HealthID and ID Security.  Beginning in early 2011, we have further focused our strategy on the growth of our HealthID segment, including the continued successful development of our GlucoChip, our Easy Check breath glucose measurement device, our iglucose wireless system, and potential strategic acquisition opportunities of businesses that are complementary to our HealthID business.  

HealthID Segment

Our HealthID segment is currently focused on the development of four products: (1) the GlucoChip, a glucose-sensing microchip, based on our proprietary intellectual property which is being developed in conjunction with Receptors LLC (“Receptors”), (2) iglucose , a stand-alone, self-contained unit that automatically queries a diabetic user’s date-capable glucometer for blood glucose data and sends that data via encrypted text messaging to the iglucose online database, (3) Easy Check, a non-invasive breath glucose detection system, based on the correlation of acetone in exhaled breath to blood glucose levels, and (4) the rapid flu detection system, also being developed in conjunction with Receptors.

Our HealthID segment also includes the VeriMed system, which uses an implantable passive RFID microchip (the “VeriChip”) that is used in patient identification applications. Each implantable microchip contains a unique verification number that is read when it is scanned by our scanner. In October 2004, the U.S. Food and Drug Administration ("FDA") cleared our VeriMed system for use in medical applications in the United States. We have not actively marketed the VeriMed system since early 2008.

ID Security Segment

Our ID Security segment includes our Identity Security suite of products, sold through our NationalCreditReport.com brand and our Health Link personal health record (“PHR”) business. Our NationalCreditReport.com business was acquired in conjunction with its merger with Steel Vault in November 2009. NationalCreditReport.com offers consumers a variety of identity security products and services primarily on a subscription basis. These services help consumers protect themselves against identity theft or fraud and understand and monitor their credit profiles and other personal information, which include credit reports, credit monitoring and credit scores. In the first quarter of 2010, the Company re-launched its Health Link PHR business. The Company focuses its marketing efforts on partnering with health care providers and exchanges, physicians group, Electronic Medical Record (“EMR”) system vendors, and insurers to use Health Link as PHR provided to their patients.

Beginning in early 2011, in conjunction with our focus on our HealthID businesses, including the development of the GlucoChip, the Easy Check breath glucose detection system, and iglucose wireless communication system, we have limited our activities in our ID Security segment.  In early 2011, we ceased acquiring new subscribers to our identity security and credit reporting businesses and, accordingly, we anticipate that our revenues from this segment in 2011 will decline significantly from 2010 amounts. Additionally, related costs to acquire such subscribers will also decline accordingly. However, we may continue to recruit and sell such customer acquisitions to third parties.


26




Results of Operations

The Company operates in two key segments: HealthID and ID Security. The following are the segment results for the three months ended March 31, 2011 and 2010.


 

 

For the Three Months Ended  

 

 

 

March 31, 2011

 

 

 

HealthID

 

 

ID Security

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

5

 

 

$

588

 

 

593

 

Cost of sales

 

 

 

 

 

60

 

 

 

60

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

5

 

 

 

528

 

 

 

533

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

2,091

 

 

 

340

 

 

 

2,431

 

Research and development

 

 

382

 

 

 

 

 

 

382

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

2,473

 

 

 

340

 

 

 

2,813

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

(2,468)

 

 

 

188

 

 

 

(2,280)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest / other income and (expense), net

 

 

66

 

 

 

 

 

 

66

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(2,402)

 

 

$

188

 

 

 $

(2,214)

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended  

 

 

 

March 31, 2010

 

 

 

HealthID

 

 

ID Security

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

75

 

 

$

598

 

 $

 

673

 

Cost of sales

 

 

45

 

 

 

171

 

 

 

216

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

30

 

 

 

427

 

 

 

457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

2,187

 

 

 

1,593

 

 

 

3,780

 

Research and development

 

 

538

 

 

 

 

 

 

538

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

2,725

 

 

 

1,593

 

 

 

4,318

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(2,695)

 

 

 

(1,166)

)

 

 

(3,861)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest / other income and (expense), net

 

 

12

 

 

 

3

 

 

 

15

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(2,683)

 

 

$

(1,163)

)

 $

 

(3,846)

 


HealthID Segment

Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010

Revenue

Revenue was $5,000 for the three months ended March 31, 2011 compared to $75,000 for the three months ended March 31, 2010. The decrease in revenue was attributable to the 2010 sale of our new 8 millimeter microchips to a medical device partner for their testing and regulatory purposes. Based on information provided to us by our device partner, they expect to receive FDA clearance for their device in the second half of 2011.  At such time, they would begin ordering transponder chips from us in fulfillment of their $3 million, five-year commitment.  No assurances can be made that they will meet that timeline.

Gross Profit and Gross Profit Margin

Our cost of sales consists of finished goods and inventory valuation charges.

We had a gross profit of $5,000 in 2011compared to a gross profit of $30,000 in 2010. This decrease was attributable to the initial sale of 8-millimeter microchips to a medical device partner in 2010, discussed above.


27




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. Other significant costs include depreciation and amortization, professional fees for accounting and legal services, consulting fees and facilities costs.

Selling, general and administrative expense decreased by $0.1 million to $2.1 million for the three months ended March 31, 2011 compared to $2.2 million for the three months ended March 31, 2010. This was attributable to our continuing efforts to reduce costs where savings opportunities can be identified.

For the three months ended March 31, 2011 and 2010, we incurred stock-based compensation expense of approximately $1.0 million and $1.1 million respectively.

Selling, general and administrative expense included depreciation and amortization expense of approximately $8,000 for the three months ended March 31, 2011 and 2010.

Research and Development

Our research and development expense consists primarily of costs associated with various projects, including testing, developing prototypes and related expenses. Research and development expense was $0.4 million for the three months ended March 31, 2011 compared to $0.5 million for the three months ended March 31, 2010. Our research and development costs represent payments to our project partners and acquisition of in process research and development.  We seek to structure our research and development expenses on a project basis to allow the management of costs and results on a discreet 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.

ID Security Segment

The ID Security segment reflects the results of National Credit Report.com from the acquisition of Steel Vault on November 10, 2009.

Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010

Revenue

Revenue was $0.6 million for the three months ended March 31, 2011 compared to $0.6 million for the three months ended March 31, 2010. Our revenue in the ID Security Segment was generated by sales of our identity security products through our National Credit Report.com subsidiary. In the first three months of 2011 we had an average of 9,600 subscribers for our credit monitoring services compared to an average of 13,000 subscribers during the three months ended March 31, 2010.  This decrease was mitigated by an increase in average revenue per customer of 11%, which in turn increased the current revenue. In early 2011, we made the decision to cease acquiring new subscribers to our identity security and credit reporting businesses.  As a result we anticipate that our revenues from this segment for the remaining quarters in 2011 will decline significantly from 2010 amounts. Additionally, related costs to acquire such subscribers will also decline accordingly.

Gross Profit and Gross Profit Margin

Cost of sales consists primarily of the costs related to purchasing the data, reporting and monitoring services from our supplier in order to provide services to our customers.

We had a gross profit of $0.5 million for the three months ended March 31, 2011 compared to $0.4 million for the three months ended March 31, 2010. The $0.1 million increase in gross profit was the result of reduced cost of sales for our identity security products through National Credit Report.com. Gross margins increased from 71.4% in the three months ended March 31, 2010 to 89.8% in the three months ended March 31, 2011, which resulted from our decision to cease acquiring new customers where first month margins are very low, and to continue providing ongoing monitoring services, where margins are significantly higher.

Selling, General and Administrative Expense

Selling, general and administrative expense consists primarily of compensation for employees in sales, marketing and operational functions, including finance and accounting. Other significant costs include professional fees and consulting fees.


28




Selling, general and administrative expense for the three months ended March 31, 2011 was $0.3 million compared to $1.6 million for three months ended March 31, 2010. This decrease of $1.3 million was the result of the Company’s decision, in early 2011, to cease acquiring new subscribers to our identity security and credit reporting businesses.  As a result we anticipate that our revenue from this segment in 2011 will decline significantly from 2010 amounts. Additionally, related costs to acquire such subscribers will also continued to decline accordingly.

Liquidity and Capital Resources

As of March 31, 2011, unrestricted cash totaled $2.2 million compared to unrestricted cash of approximately $1.8 million at December 31, 2010.

Cash Flows Used in Operating Activities

Net cash used in operating activities totaled $1.5 million and $1.8 million during the three months ended March 31, 2011 and 2010, respectively. For each of the periods presented, cash was used primarily to fund operating losses, and payments of accounts payable and accrued expenses.

Cash Flows from Investing Activities

Investing activities used cash of $7,000 and $19,000 during the three months ended March 31, 2011 and 2010, respectively, which was used to purchase equipment.

Cash Flows from Financing Activities

Financing activities provided cash of $1.9 million and $0.3 million during the three months ended March 31, 2011 and 2010, respectively. During the three months ended March 31, 2011, cash was provided by the Socius financing (see Note 3) which included the issuance of 190 shares of Series B preferred stock.

Financial Condition

As of March 31, 2011, we had working capital of approximately $0.8 million and an accumulated deficit of $71.8 million compared to a working capital of approximately $0.2 million and an accumulated deficit of approximately $69.6 million as of December 31, 2010. The increase in working capital was due to the capital raised through the Socius financing (see Note 3), net of operating losses.

The Company has incurred operating losses since and prior to the merger that created PositiveID.  The current operating losses are the result of the Company’s funding of its development products and projects:  the GlucoChip, the iglucose wireless communications system, the Easy Check breath analysis device, and the rapid flu detection system.  Operating losses are also due to salary costs, consulting fees, legal, accounting and other general administrative costs. The Company expects its operating losses to continue during the next twelve months.

Until we are able to achieve operating profits, it is our intention to continue to try to access the capital markets to fund the development of our HealthID products.  Since December 31, 2010 and March 31, 2011, we have raised $3.3 million and $1.4 million, respectively, under our Socius and Optimus financing facilities.  We also have $2.6 million of remaining capacity available under the amended Optimus agreement.  Additionally, we currently have an effective “shelf” registration statement on Form S-3 which registers up to $9.6 million of securities.  Under that registration statement, we have $3.9 million of availability remaining as of the date hereof. Because the aggregate market value of our common equity held by non-affiliates is less than $75 million, we may offer only up to one-third of the aggregate market value of our common equity held by non-affiliates less any amount sold under the registration statement during the prior 12 months. As such, the amount we may offer under the registration statement could be less at the time a sale is contemplated.

The Company believes that with its current working capital, its access to capital under its equity line agreement, and through either new capital raised under its shelf registration statement, and/or reducing and delaying certain research, development and related activities, it will have sufficient funds available to meet its working capital requirements over the next twelve months. There can be no assurances that it will be successful in negotiating 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.


29




Impact of Recently Issued Accounting Standards

In January 2010, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurements. The ASU requires disclosing the amounts of significant transfers in and out of Level 1 and 2 fair value measurements and to describe the reasons for the transfers. The disclosures are effective for reporting periods beginning after December 15, 2009. Additionally, disclosures of the gross purchases, sales, issuances and settlements activity in Level 3 fair value measurements will be required for fiscal years beginning after December 15, 2010. This standard had no significant impact on our financial position or results of operations.

In January 2010, the FASB issued ASU 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash (A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic 505 clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a limit on the amount of cash that will be distributed is not a stock dividend for purposes of applying Topics 505 and 260. ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009, and would be applied on a retrospective basis. The adoption of the provisions of ASU 2010-01 did not have a material effect on the financial position, results of operations or cash flows of the Company.

In April 2010, the FASB issued ASU No. 2010 - 17 – Revenue Recognition - Milestone Method (Topic 605): Milestone Method of Revenue Recognition . This standard provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for certain research and development transactions. Under this new standard, a company can recognize as revenue consideration that is contingent upon achievement of a milestone in the period in which it is achieved, only if the milestone meets all criteria to be considered substantive.  This standard will be effective for us on a prospective basis for periods beginning after January 1, 2011.  This standard had no significant impact on our financial position or results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Evaluation of Disclosure Controls . We evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of March 31, 2011. 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 chief financial officer (“CFO”). Rules adopted by the SEC require that in this section of our Quarterly Report on Form 10-Q we present the conclusions of the CEO and CFO about the effectiveness of our disclosure controls and procedures as of March 31, 2011 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 Quarterly Report on Form 10-Q, 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 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 CFO have concluded that, as of March 31, 2011, our disclosure controls and procedures were effective to provide reasonable assurance that the foregoing objectives are achieved.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act that occurred during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


30




PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

The information set forth in Note 6 to the Condensed Financial Statements in Part I, Item I of this Form 10-Q is incorporated herein by reference.

Item 1A. Risk Factors.

Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 includes a detailed discussion of other risk factors that could materially affect our business, financial condition or future results.  

The Company failed to meet applicable Nasdaq Stock Market requirements and as a result its stock could be delisted by the Nasdaq Stock Market. If delisting occurs, it would adversely affect the market liquidity of its common stock and harm its businesses.

On September 13, 2010, the Company received a letter from the Nasdaq indicating that the Company is not in compliance with the Nasdaq’s requirements for continued listing because, for the 30 consecutive business days prior to September 13, 2010, the bid price of its common stock closed below the minimum $1.00 per share price requirement for continued listing under Nasdaq Listing Rule 5550(a)(2) (the “Rule”).  The Company had 180 calendar days (or until March 14, 2011) to regain compliance with the bid price requirement.

On March 15, 2011, the Company received a letter from the Nasdaq staff  notifying the Company of a staff determination that the Company has not regained compliance with the $1.00 per share minimum bid price requirement set forth in the Rule and that based on the Company’s financial statement information as of September 30, 2010 (i.e., the date of the Company’s most recent periodic report filed with the SEC), it was not eligible, in accordance with Listing Rule 5810(c)(3)(A)(ii), for a second 180-calendar day cure period with respect to the bid price deficiency.  To be eligible for the additional 180-calendar day cure period, the Company would have had to meet the applicable standards for initial listing on The Nasdaq Capital Market (except the bid price requirement) based on its most recent public filings.  The March 15, 2011 letter notes that the Company’s stockholders’ equity as of September 30, 2010 of $4,697,000 does not meet the $5 million initial listing requirement for The Nasdaq Capital Market.

 Nasdaq advised the Company that it could appeal the Nasdaq staff's determination to a Nasdaq Hearings Panel (the "Panel") in accordance with the procedures set forth in the Nasdaq Listing Rule 5800 Series. The Company requested a hearing on March 21, 2011, in accordance with applicable Listing Rules, and the hearing took place on April 28, 2011.  The filing of the appeal automatically stayed any delisting procedures until after the determination of the Panel. At the hearing, the Company presented a plan to regain compliance to the Panel and requested that the Panel grant the Company an exception to Nasdaq’s continued listing standards for a sufficient period to implement that plan.   Under Listing Rule 5815(c)(1), the Panel has the discretion to grant such an exception for a period not to exceed 180 days, with the exception period commencing as of the date of the Nasdaq staff’s notification of the deficiency for which the exception is granted. There can be no assurance that the Panel will accept the Company’s compliance plan or grant the Company’s request for continued listing.

If the Company’s common stock is delisted from the Nasdaq Stock Market, trading of its common stock most likely will be conducted in the over-the-counter market on an electronic bulletin board established for unlisted securities, such as the OTC Bulletin Board. Delisting would adversely affect the market liquidity of its common stock and harm the Company’s business and may hinder or delay its ability to consummate potential strategic transactions or investments. Such delisting could also adversely affect the Company’s ability to obtain financing for the continuation of its operations and could result in the loss of confidence by investors, suppliers and employees.

Item 2. Unregistered Sale of Equity Securities .

During the three months ended March 31, 2011, we sold 390,000 shares of our common stock that were not registered under the Securities Act of 1933, as amended. 

On February 24, 2011, we issued 200,000 shares of our common stock, valued at $114,000, to Easy Check Medical Diagnostics, LLC for product royalties for successful patent grants and product or license revenues. 

On February 24, 2011, we issued 125,000 shares of our common stock, valued at $71,250, to Receptors, LLC in connection with the execution of an amended and restated license agreement.


31




On March 25, 2011, we issued 65,000 shares of our common stock, valued at $30,550, to Stonegate Securities, Inc. in connection with the execution of an advisory services agreement.

The shares of common stock described in this Item 2 were issued without registration in reliance upon the exemption provided, among others, by Section 4(2) of the Securities Act of 1933, as amended, as a transaction not involving any public offering.

Item 5. Other Information.

On May 11, 2011, the Company presented Socius with a notice of redemption of the 420 shares of Series B Preferred Stock held by Socius for a price of $4.2 million and a premium for early redemption of $1.3 million. The consideration was paid by offset against the promissory notes held by the Company and any dividends due and owing on the shares redeemed. Thus, as of May 11, 2011, the Company has no shares of Series B Preferred Stock outstanding.  For more information, see Note 3, "Financing Agreements," to the Condensed Consolidated Financial Statements.

Item 6. Exhibits.

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


32




SIGNATURES


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


 

POSITIVEID CORPORATION

(Registrant)

 

 

 

Date: May 13, 2011

By:  

  /s/ William J. Caragol

 

 

William J. Caragol  

 

 

President and Chief Financial Officer

(Duly Authorized Officer and Principal Financial Officer)




33




Exhibit Index


Exhibit

 

 

Number

 

Description

 

2.1

 

 

Stock Purchase Agreement, dated May 9, 2011 among PositiveID Corporation, MicroFluidic Systems and the individuals named therein (1)

 

3.1

 

 

Second Amended and Restated Certificate of Incorporation of PositiveID Corporation filed with the Secretary of State of Delaware on December 18, 2006, as amended on November 10, 2009 (2)

 

3.2

 

 

Amended and Restated By-laws of PositiveID Corporation adopted as of December 12, 2005, as amended on March 16, 2010 (3)

 

4.1

 

 

Form of Specimen Common Stock Certificate (3)

 

10.1

 

AT&T Machine to Machine Wireless Communications Agreement, dated January 24, 2011, between PositiveID Corporation and AT&T Mobility II, LLC (2)

 

10.2

 

Raytheon Microelectronics Proposal for the Manufacturing and Test of Transponder RFID S100, dated as of February 24, 2011, between PositiveID Corporation and Raytheon Microelectronics España S.A. (2)

 

10.3

 

 

Amended and Restated Convertible Preferred Stock Purchase Agreement, dated March 14, 2011, between PositiveID Corporation and Optimus Capital Partners, LLC (4)

 

31.1

*

 

Certification by Chief Executive Officer, pursuant to Exchange Act Rules 13A-14(a) and 15d-14(a)

 

31.2

*

 

Certification by Chief Financial Officer, pursuant to Exchange Act Rules 13A-14(a) and 15d-14(a)

 

32.1

*

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*

Filed herewith.

Confidential treatment has been obtained with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

(1)

Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on May 12, 2011.

(2)

Incorporated by reference to the Form 10-K previously filed by PositiveID Corporation on March 25, 2011.

(3)

Incorporated by reference to the Form 10-K previously filed by PositiveID Corporation on March 19, 2010.

(4)

Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on March 14, 2011.




34


Exhibit 31.1

Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002


I, Scott R. Silverman, certify that:

1.

 

I have reviewed this Quarterly Report on Form 10-Q of PositiveID Corporation;

2.

 

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

 

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

 

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

 

a)

 

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)

 

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

 

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

 

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.

 

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)

 

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)

 

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


 

 

 

 

 




Date: May 13, 2011

/s/ Scott R. Silverman

 

 

Scott R. Silverman 

 

 

Chief Executive Officer
(Principal Executive Officer) 

 




Exhibit 31.2

Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002


I, William J. Caragol, certify that:

1.

 

I have reviewed this Quarterly Report on Form 10-Q of PositiveID Corporation;

2.

 

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

 

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

 

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

 

a)

 

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)

 

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

 

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

 

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.

 

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)

 

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)

 

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


 

 

 

 

 


Date: May 13, 2011 

 /s/ William J. Caragol

 

 

William J. Caragol 

 

 

President and Chief Financial Officer
(Principal Financial Officer) 

 




Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Quarterly Report of PositiveID Corporation (the “Company”) on Form 10-Q for the period ending March 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Scott R. Silverman, Chief Executive Officer of the Company, and I, William J. Caragol, President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:


(1)

 

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

 

The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 

 

 

 

 

/s/ Scott R. Silverman

 

 

 

Scott R. Silverman

 

 

 

Chief Executive Officer

 

 

 

Date: May 13, 2011

 

 

 

 

 

 

 

 /s/ William J. Caragol

 

 

 

William J. Caragol

 

 

 

President and Chief Financial Officer

 

 

 

Date: May 13, 2011

 

 


A signed original of this written statement required by Section 906 has been provided to PositiveID Corporation and will be retained by PositiveID Corporation and furnished to the Securities and Exchange Commission or its staff upon request.