PositiveID
POSITIVEID Corp (Form: 10-Q, Received: 11/14/2011 17:07:40)
 
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 September 30, 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 þ 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 November 11, 2011 is as follows:

Class
 
Number of Shares
Common Stock: $0.01 Par Value
 
53,502,779
 
 
 

 
 
POSITIVEID CORPORATION
TABLE OF CONTENTS

   
PART I —FINANCIAL INFORMATION
 
   
ITEM 1. FINANCIAL STATEMENTS
 
   
Condensed Consolidated Balance Sheets — September 30, 2011 (unaudited) and December 31, 2010
1
   
Unaudited Condensed Consolidated Statements of Operations — Three and Nine Months Ended September 30, 2011 and 2010
2
   
Unaudited Condensed Consolidated Statement of Stockholders’ Equity (Deficit) — Nine Months Ended September 30, 2011
3
   
Unaudited Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2011 and 2010
4
   
Notes to Unaudited Condensed Consolidated Financial Statements
5
   
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
21
   
   
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
23
   
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
27
   
ITEM 4. CONTROLS AND PROCEDURES
27
   
PART II — OTHER INFORMATION
 
   
ITEM 1. LEGAL PROCEEDINGS
28
   
ITEM 1A. RISK FACTORS
28
   
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
28
   
ITEM 5. OTHER INFORMATION
28
   
ITEM 6. EXHIBITS
28
   
SIGNATURES
29
 
 
 

 
 
PART I — FINANCIAL INFORMATION
 
Item 1. Financial Statements.
POSITIVEID CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except share data)

   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(unaudited)
       
             
Assets
           
Current Assets:
           
Cash and cash equivalents
 
$
472
   
$
1,764
 
Prepaid expenses and other current assets
   
186
     
173
 
Assets held for sale
   
     
1,305
 
Total Current Assets
   
658
     
3,242
 
                 
Equipment, net
   
54
     
49
 
Goodwill
   
510
     
 
Intangibles, net
   
1,487
     
 
Other assets
   
258
     
24
 
Total Assets
 
$
2,967
   
$
3,315
 
                 
Liabilities and Stockholders’ Equity (Deficit)
               
Current Liabilities:
               
Accounts payable
 
$
851
   
$
490
 
Accrued expenses and other current liabilities
   
1,094
     
1,067
 
Accrued preferred stock dividends payable
   
70
     
152
 
Total Current Liabilities
   
2,015
     
1,709
 
                 
Contingent earn-out liability
   
750
     
 
Stock obligation to related party (see Note 9)
   
3,394
     
 
                 
Commitments and contingencies
               
                 
Stockholders’ Equity (Deficit):
               
Preferred stock, 5,000,000 shares authorized, $.001 par value; Series B Preferred - 230 shares issued and outstanding, liquidation preference of $2,300, at December 31, 2010; Series C Preferred – 140 shares issued and outstanding, liquidation preference of $1,400, at September 30, 2011; Series F Preferred - 630 shares issued and outstanding, liquidation preference of $630, at September 30, 2011
   
     
 
Common stock, 70,000,000 shares authorized, $.01 par value; 47,688,494 and 33,047,405 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively
   
477
     
330
 
Additional paid-in capital
   
80,273
     
74,002
 
Accumulated deficit
   
(81,692
)
   
(69,621
)
     
(942
   
4,711
 
Note receivable for shares issued
   
(2,250
)
   
(3,105
)
Total Stockholders’ Equity (Deficit)
   
(3,192
)
   
1,606
 
Total Liabilities and Stockholders’ Equity (Deficit)
 
$
2,967
   
$
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)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Revenue
 
$
   
$
   
$
   
$
75
 
Cost of sales
   
     
     
     
45
 
Gross profit
   
     
     
     
30
 
                                 
Operating expenses:
                               
Selling, general and administrative
   
2,830
     
2,642
     
8,082
     
7,192
 
Research and development
   
134
     
197
     
618
     
1,229
 
Stock compensation to related party (see Note 9)
   
3,394
     
     
3,394
     
 
Total operating expenses
   
6,358
     
2,839
     
12,094
     
8,421
 
Operating loss from continuing operations
   
(6,358
)
   
(2,839
)
   
(12,094
)
   
(8,391)
 
                                 
Other income (expense), net
   
4
     
20
     
80
     
16
 
Loss from continuing operations
   
(6,354
)
   
(2,819
)
   
(12,014
)
   
(8,375)
 
                                 
Discontinued operations:
                               
Income (loss) from discontinued operations
   
28
     
(969)
     
498
     
(3,122
)
Impairment of goodwill
   
     
     
(555
)
   
 
Total income (loss) from discontinued operations
   
28
     
(969)
     
(57
)
   
(3,122
)
Net loss
   
(6,326
)
   
(3,788)
     
(12,071
)
   
(11,497)
 
                                 
Preferred stock dividends
   
(40
)
   
(58)
     
(201
)
   
(94)
 
Net loss attributable to common stockholders
 
$
(6,366
)
 
$
(3,846)
   
$
(12,272
)
 
$
(11,591)
 
                                 
Loss from continuing operations per common share attributable to common stockholders
 
$
(0.16
)
 
$
(0.11)
   
$
(0.35
)
 
$
(0.36)
 
Loss from discontinued operations per common share
   
     
(0.04)
     
     
(0.14)
 
Loss per common share attributable to common stockholders – basic and diluted
 
$
(0.16
)
 
$
(0.15)
   
$
(0.35
)
 
$
(0.50)
 
                                 
Weighted average shares outstanding – basic and diluted
   
39,049
     
26,137
     
35,117
     
23,292
 

See accompanying notes to unaudited condensed consolidated financial statements.
 
 
2

 
 
POSITIVEID CORPORATION
Condensed Consolidated Statement of Stockholders’ Equity (Deficit)
For the Nine Months Ended September 30, 2011
(In thousands)
(Unaudited)

                                   
Additional
           
Note Receivable
For
   
Total
Stockholders’
 
   
Preferred Stock
   
Common Stock
   
Paid-in
   
Accumulated
   
Shares
    Equity  
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Issued
   
(Deficit)
 
                                                                 
Balance at December 31, 2010
   
230
   
$
     
33,047
   
$
330
   
$
74,002
   
$
(69,621)
   
$
(3,105)
   
$
1,606
 
                                                                 
Issuance of Series B Preferred shares
   
190
     
     
     
     
1,900
     
     
     
1,900
 
Issuance of Common Stock for note receivable
   
     
     
2,721
     
27
     
1,873
     
     
(1,900)
     
 
Issuance of Common Stock for note receivable upon warrant exercise
   
     
     
952
     
10
     
655
     
     
(665)
     
 
Issuance of Common Stock pursuant to acquisition of Easy Check assets
   
     
     
200
     
2
     
112
     
     
     
114
 
Issuance of Series C Preferred shares, net of costs
   
140
     
     
     
     
1,228
     
     
     
1,228
 
Redemption of Series B Preferred shares
   
(420)
     
     
     
     
(5,465)
     
     
5,670
     
205
 
Issuance of Common Stock pursuant to acquisition of MicroFluidic Systems
   
     
     
3,346
     
34
     
1,211
     
     
     
1,245
 
Issuance of Series F Preferred shares, net of costs
   
630
     
     
     
     
313
     
     
     
313
 
Issuance of Common Stock for cash and note receivable
   
     
     
6,812
     
68
     
2,432
     
     
(2,250)
     
250
 
Accrual of preferred stock dividends
   
     
     
     
     
(201)
     
     
     
(201)
 
Stock-based compensation
   
     
     
610
     
6
     
2,213
     
     
     
2,219
 
Net loss
   
     
     
     
     
     
(12,071)
     
     
(12,071)
 
                                                                 
Balance at September 30, 2011
   
770
   
$
     
47,688
   
$
477
   
$
80,273
   
$
(81,692)
   
$
(2,250)
   
$
(3,192)
 

See accompanying notes to unaudited condensed consolidated financial statements.
 
 
3

 
 
POSITIVEID CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

   
Nine Months Ended
 
   
September 30,
 
   
2011
   
2010
 
                 
Cash flows from operating activities:
               
Net loss
 
$
(12,071
 
$
(11,497)
 
Add: Loss from discontinued operations
   
57
     
3,122
 
Loss from continuing operations
   
(12,014
   
(8,375)
 
Adjustments to reconcile loss from continuing operations to net cash used in operating activities:
               
Depreciation and amortization
   
163
     
19
 
Stock-based compensation
   
2,219
     
3,732
 
Stock issued to advisor for acquisition
   
365
     
 
Stock compensation to related party (see Note 9)
   
3,394
     
 
In-process research and development allocation from asset purchase
   
114
     
350
 
Impairment of goodwill
   
555
     
 
Non-cash interest income
   
     
(26
)
Non-cash interest expense
   
     
35
 
Changes in operating assets and liabilities:
               
Increase in prepaid expenses and other current assets
   
(202
)
   
(78
Increase in accounts payable and accrued expenses
   
284
     
61
 
Net cash used in discontinued operations
   
(540
)
   
(1,361
Net cash used in operating activities
   
(5,662
   
(5,643
Cash flows from investing activities:
               
Acquisition of MicroFluidic Systems
   
(24
   
 
Proceeds from sale of NationalCreditReport.com
   
675
     
 
Proceeds from sale of equipment
   
46
     
 
Purchase of equipment
   
(18
   
(28
Net cash provided by (used in) investing activities
   
679
     
(28
Cash flows from financing activities:
               
Proceeds from equity financings, net of fees
   
3,691
     
2,190
 
Proceeds from exercise of stock options
   
     
359
 
Net cash provided by financing activities
   
3,691
     
2,549
 
Net decrease in cash and cash equivalents
   
(1,292
   
 (3,122)
 
Cash and cash equivalents, beginning of period
   
1,764
     
6,423
 
Cash and cash equivalents, end of period
 
$
472
   
$
3,301
 

See accompanying notes to unaudited condensed consolidated financial statements.
 
 
4

 
 
POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
 
1. Business and Basis of Presentation
 
PositiveID Corporation (the “Company”) (formerly VeriChip 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 is referred to as, “Digital Angel.” The terms of the APA included the 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 (“GlucoChip”). The Company also received covenants from Digital Angel and Destron Fearing that will permit the use of intellectual property of Digital Angel related to the Company’s health care business without payment of ongoing royalties.
 
In September 2009, VeriChip Acquisition Corp., a Delaware corporation and wholly-owned subsidiary (the “Acquisition Subsidiary”), and Steel Vault Corporation, a Delaware corporation (“Steel Vault”), entered into 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 a wholly-owned subsidiary of the Company (the “Merger”). At the closing of the Merger, the Company’s name was changed from VeriChip Corporation to PositiveID Corporation.
 
In February 2010, the Company acquired the assets of Easy Check Medical Diagnostics, LLC (“Easy Check”), which included the Easy Check breath glucose detection system and the iglucose   wireless communication system. These products are currently under development. (See Note 2)
 
In May 2011, the Company entered into a Stock Purchase Agreement to acquire MicroFluidic Systems, a California corporation (“MicroFluidic”), pursuant to which MicroFluidic became a wholly-owned subsidiary of the Company. MicroFluidic 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. (See Note 2)
 
In July 2011, the Company completed the sale of substantially all of the assets of NationalCreditReport.com, which had been acquired in connection with the Merger. (See Note 3)
 
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.
 
The accompanying condensed consolidated balance sheet as of December 31, 2010 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. The accompanying unaudited condensed consolidated financial statements as of September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of the Company’s management, all adjustments (including normal recurring adjustments) necessary for a fair presentation for the periods presented have been reflected as required by Regulation S-X, Rule 10-01.
 
The unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 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.

Going Concern
 
The Company’s condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of September 30, 2011, the Company had a working capital deficiency of approximately $1.4 million and an accumulated deficit of approximately $82 million. The Company has incurred operating losses prior to and since the merger that created PositiveID. The current operating losses are the result of selling, general and administrative expenses and the Company's funding of its development projects and products. The Company expects its operating losses to continue through 2012.
 
 
5

 
 
POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements

The Company’s ability to continue as a going concern is dependent upon its ability to obtain financing to fund the continued development of its HealthID products, the operations of MicroFluidic, and working capital requirements. Until the Company is able to achieve operating profits, it will continue to seek to access the capital markets.  Since December 31, 2010, the Company has raised approximately $3.3 million under its Socius and Optimus financing facilities (see Note 4). Additionally, in July 2011, the Company executed an equity financing with Ironridge that, subject to certain conditions, may provide the Company with funding of up to $13.8 million, of which approximately $0.8 million has been funded through September 30, 2011 (see Note 4).  An aggregate of $9.8 million of the Ironridge financing is, among other things, subject to the effectiveness of a registration statement that we have filed with the SEC, and the amount of funding available under the facility overall is largely dependent upon the Company’s stock price and trading volume. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

Management believes that its current cash resources and its expected access to capital under the Ironridge financing arrangement will provide sufficient funds to meet its working capital requirements for the near-term future. In addition and if necessary, the Company could reduce and/or delay certain discretionary research, development and related activities and costs. However, there can be no assurances that the Company will be able to derive sufficient funding under the Ironridge facility or 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, and result in significant dilution to the Company’s existing stockholders. The Company’s condensed consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
 
  Discontinued Operations

In connection with the Company’s sale of its NationalCreditReport.com business in July 2011, certain assets of the subsidiary have been classified as held for sale in the accompanying condensed consolidated balance sheets, and its results of operations have been presented as discontinued operations in the accompanying unaudited condensed consolidated statements of operations (see Note 3). Related amounts for prior periods presented have been reclassified to conform to the current period presentation.
 
Loss per Common Share
 
Basic and diluted loss per common share for all periods presented is calculated based on the weighted average common shares outstanding for the period. The following potentially dilutive securities were outstanding as of September 30, 2011 and 2010 and were not included in the computation of dilutive loss per common share because the effect would have been anti-dilutive (in thousands):

   
September 30,
 
   
2011
   
2010
 
Convertible preferred stock
   
4,760
     
1,735
 
Stock options
   
4,474
     
3,541
 
Warrants
   
304
     
454
 
Unvested shares of restricted common stock
   
4,385
     
3,995
 
     
13,923
     
9,725
 

Segment Information
 
Through the second quarter of 2011, the Company operated in two business segments: HealthID and ID Security. The ID Security segment is presented as discontinued operations in the accompanying condensed consolidated financial statements (see Note 3).
 
 
6

 
 
POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
 
HealthID Segment
 
The Company’s HealthID segment is focused on the development of three products: (1) the GlucoChip, a glucose-sensing microchip, based on the Company’s 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 data-capable glucometer for blood glucose data and sends that data via machine-to-machine technology to the iglucose online database, and (3) Easy Check, a non-invasive breath glucose detection system, based on the correlation of acetone in exhaled breath to blood glucose levels.
 
The Company’s 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 a scanner. The Company is not currently marketing the VeriMed system.
 
ID Security Segment
 
The Company’s ID Security segment included its Identity Security suite of products, sold through NationalCreditReport.com and the Company’s Health Link personal health record (“PHR”) business. The NationalCreditReport.com business offered consumers a variety of identity security products and services primarily on a subscription basis. These services helped consumers protect themselves against identity theft or fraud and understand and monitor their credit profiles and other personal information, which included credit reports, credit monitoring and credit scores. For its Health Link PHR business, the Company focused its marketing efforts on partnering with health care providers and exchanges, physicians groups, Electronic Medical Record system vendors, and insurers to use Health Link as PHR provided to their patients. The Company is not currently actively marketing its Health Link PHR business.
 
As a result of the sale of the Company’s NationalCreditReport.com business in July 2011, the Company now operates in one segment (HealthID). Since the sale of NationalCreditReport.com, the Company is not currently generating revenue.
  
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 value of $1.71 per share.  The purchase price for the assets was expensed as in-process research and development as the development of these projects had not yet reached technological feasibility.
 
In February 2011 the Company amended the purchase agreement, paying the seller of the assets an additional 200,000 shares of its common stock valued at $114,000, based on a value of $0.57 per share, and lowering the potential royalty on future income from these products from 25% to 10%. The value transferred was expensed as in-process research and development as the related projects had not yet reached technological feasibility at the time of the amendment.
 
MicroFluidic Acquisition
 
On May 23, 2011, the Company acquired all of the outstanding capital stock of MicroFluidic in a transaction accounted for using the purchase method of accounting (the “Acquisition”). Since MicroFluidic's inception, its key personnel have had an important role in developing technologies to automate the process of biological pathogen detection. MicroFluidic’s substantial portfolio of intellectual property related to sample preparation and rapid medical testing applications are complementary to the Company’s portfolio of virus detection and diabetes management products.

As consideration for the consummation of the Acquisition, the Company paid $250,000 to fund certain accounts payable of MicroFluidic (of which approximately $24,000 was paid to selling shareholders) and issued 2,375,000 shares of common stock of the Company (the “Stock Consideration”). Additionally, the Company issued a total of 971,429 shares of common stock to its advisors for brokerage services rendered in conjunction with the Acquisition. The Company incurred a nonrecurring charge of approximately $550,000 related to the direct costs of the Acquisition, consisting of the $365,000 value of the shares of common stock issued to its advisors and $185,000 of cash costs, which is recorded in operating expenses in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2011.
 
 
7

 
 
POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
 
In connection with the Acquisition, the Company is also required to make certain earn-out payments, up to a maximum of $7,000,000 payable in shares of the Company’s common stock, upon certain conditions over the next three years (the “Earn-Out Payment”). The earn-out for 2011 is based upon the value of contracts secured by MicroFluidic through December 31, 2011, subject to a maximum Earn-Out Payment of $2,000,000. The earn-out for years 2012-2014 is based on MicroFluidic achieving certain earnings targets for the respective year, subject to a maximum Earn-Out Payment of $2,000,000 per year and an overall cumulative maximum Earn-Out Payment of $7,000,000. However, the Company is prohibited from making any Earn-Out Payment until stockholder approval is obtained if the aggregate number of shares to be issued exceeds 19.99% of the Company’s common stock outstanding immediately prior to the closing. In the event the Company is unable to obtain any required stockholder approval, the Company is obligated to pay the applicable Earn-Out Payment in cash to the sellers. In addition, the Company may pay any applicable Earn-Out Payment in cash at its option.
 
The estimated purchase price of the Acquisition totaled approximately $1,653,000, comprised of (i) $24,000 in cash, (ii) Stock Consideration of $879,000 based on a value of $0.37 per share, and (iii) contingent consideration of approximately $750,000. The fair value of the contingent consideration was estimated based upon the present value of the probability-weighted expected future payouts under the earn-out arrangement.

The purchase agreement provided for a purchase price adjustment based on the closing balance sheet working capital of MicroFluidic. As the working capital shortfall and amount of any resulting downward adjustment to the purchase price was undetermined at the time, no related amounts were recorded in the initial purchase accounting reflected in the Company’s June 30, 2011 unaudited financial statements. Management subsequently estimated the working capital shortfall to be approximately $350,000. On October 31, 2011, the Company entered into an agreement with two of the selling MicroFluidic shareholders pursuant to which the two individuals waived their right to any earn-out compensation for 2011 in settlement of the closing working capital adjustment provisions of the purchase agreement. The two individuals represent approximately 68% of the selling shareholder interests, and thus any earn-out for 2011 would be reduced by such percentage. As a result, the Company reduced its estimate of the fair value of the contingent consideration by $650,000 from the preliminary liability reflected in the Company’s June 30, 2011 unaudited balance sheet, with a corresponding reduction in goodwill.

Under the purchase method of accounting, the estimated purchase price of the Acquisition was allocated to MicroFluidic’s net tangible and identifiable intangible assets and liabilities assumed based on their estimated fair values as of the date of the completion of the Acquisition, as follows (in thousands):
 
Assets acquired:
 
   Net tangible assets
 
$
125
 
   Customer contracts and relationships
   
230
 
Patents
   
1,223
 
   Non-compete agreement
   
169
 
   Goodwill
   
510
 
     
2,257
 
Liabilities assumed:
 
   Current liabilities
   
(604
)
Total estimated purchase price
 
$
1,653
 
 
The estimated fair values of certain assets and liabilities have been determined by management based upon a third-party valuation. The goodwill recorded in connection with the Acquisition is allocated to the Company’s HealthID segment, and no portion of the intangible assets, including goodwill, is expected to be deductible for tax purposes.

The results of operations of MicroFluidic are included in the Company’s condensed consolidated statements of operations from the date of the acquisition of May 23, 2011, including $0 of revenue and approximately $450,000 of net loss. The following supplemental pro forma information assumes that the Acquisition had occurred as of January 1 for each period presented (in thousands except per share data):
 
 
8

 
 
POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Revenue
 
$
   
$
1,160
   
$
235
   
$
5,291
 
Net loss
 
$
(6,326)
   
$
(4,253)
   
$
(12,678)
   
$
(12,333)
 
Loss per common share – basic and diluted
 
$
(0.16)
   
$
(0.15)
   
$
(0.35)
   
$
(0.47)
 
 
The pro forma financial information is not necessarily indicative of the results that would have occurred if the Acquisition had occurred on the dates indicated or that may result in the future. The pro forma revenue reflected relates to revenue reported by MicroFluidic, substantially all of which was generated under two contracts with an agency of the U.S. Government. The two contracts were completed by March 31, 2011 and as of September 30, 2011 MicroFluidic had no active revenue-generating contracts. The pro forma results for the nine months ended September 30, 2010 exclude a charge of approximately $550,000 related to the direct costs of the Acquisition, which is included in the Company’s results of operations for the period after the date of the Acquisition and thus in the pro forma results for the nine months ended September 30, 2011.

3. Discontinued Operations
 
Beginning at the end of 2010, in conjunction with the Company’s focus on its HealthID businesses, including the development of the GlucoChip, the Easy Check breath glucose detection system, and iglucose   wireless communication system, the Company began to limit the activities of its ID Security segment, which included its wholly-owned NationalCreditReport.com subsidiary. In early 2011, the Company ceased acquiring new subscribers for its NationalCreditReport.com business, and in the second quarter of 2011 the Company began actively marketing the business for sale. On July 22, 2011, the Company completed the sale of substantially all of the assets of NationalCreditReport.com for $750,000 in cash. The buyer retained $75,000 from the purchase price pending the final determination of indemnification obligations for a period of eighteen months from the closing date.
 
The transferred assets of NationalCreditReport.com have been classified as held for sale in the accompanying condensed consolidated balance sheet as of December 31, 2010, and consist of the following (in thousands): 
 
Equipment, net
  $ 70  
Intangible assets, net
    385  
Goodwill
    850  
Total
  $ 1,305  
 
In connection with the decision to sell the NationalCreditReport.com business, the carrying value of the subsidiary’s net assets was written down to their estimated fair value, determined based upon the proceeds realized upon the sale in July 2011. As a result, an impairment of the carrying value of goodwill of approximately $555,000 was recognized during the second quarter of 2011 and is included in the loss from discontinued operations in the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2011.
 
Historical revenue related to the NationalCreditReport.com business and included in the income (loss) from discontinued operations in the accompanying condensed consolidated statements of operations totaled approximately $44,000 and $988,000 for the three and nine months ended September 30, 2011, respectively, and approximately $972,000 and $2,249,000 for the three and nine months ended September 30, 2010, respectively.
 
4. Financing Agreements
 
Optimus Financing
 
On September 29, 2009, the Company entered into a Convertible Preferred Stock Purchase Agreement (the “Optimus Purchase Agreement”) with Optimus Technology Capital Partners, LLC (“Optimus”) under which Optimus was committed to purchase up to $10 million shares of convertible Series A Preferred Stock of the Company in one or more tranches.
 
 
9

 
 
POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
 
To facilitate the transactions contemplated by the Optimus Purchase Agreement, R & R Consulting Partners, LLC (“R&R), a company controlled by Scott R. Silverman, the Company’s Chairman of the Board, loaned shares of common stock of the Company to Optimus equal to 135% of the aggregate purchase price for each tranche pursuant to stock loan agreements between R & R and Optimus. R & R was paid a $100,000 fee in October 2009 plus will be paid 2% interest for the fair value of the loaned shares for entering into the stock loan arrangement. R & R 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 Series A 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 loaned Optimus 1.3 million, 800,000 and 600,000 shares, respectively, of common stock.
 
On September 29, 2009, the Company exercised the first tranche of the Optimus financing, pursuant to which it issued 296 shares of Series A Preferred Stock for a purchase price of approximately $3.0 million. In support of this tranche, R & R loaned Optimus 1.3 million shares of common stock. The tranche closed on October 13, 2009, and the Company received proceeds of approximately $3.0 million, less the fees due on the entire financing commitment of approximately $800,000. On November 5, 2009, the Company closed the second tranche of this financing, issuing 166 shares of Series A Preferred Stock for a purchase price of approximately $1.7 million. In support of this tranche, R & R loaned Optimus approximately 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 common stock.  Optimus returned these shares to R & R in repayment of the loan. The conversion of the Series A Preferred Stock was determined by a fixed conversion price that was determined at the time of the two tranche closings, which was approximately $3.07 and $1.60 per share, respectively. The Company was required to issue make-whole shares to Optimus equal to 35% of the Series A Preferred Stock Liquidation Value ($10,000 per share of Series A Preferred Stock) because the Series A Preferred Stock was redeemed prior the first anniversary of the issuance date.  On October 13, 2010, the Company filed a Certificate of Elimination with the Secretary of State of the State of Delaware effecting the elimination of the Certificate of Designation of Preferences, Rights and Limitations of the Series A Preferred Stock.  No shares of Series A Preferred Stock remained outstanding as of December 31, 2010.
 
On March 14, 2011, the Company entered into an Amended and Restated Convertible Preferred Stock Purchase Agreement (the “Amended Optimus Purchase Agreement”) with Optimus. The Amended Optimus Purchase Agreement amended and restated the Optimus Purchase Agreement, and, among other things, specifically (i) replaced the Series A Preferred Stock issuable under the Optimus Purchase Agreement with Series C Preferred Stock with substantially similar terms, and (ii) reduced the maximum amount of preferred stock issuable to Optimus under the Optimus Purchase Agreement from $10 million to $8.7 million, of which $4.7 million was previously issued in 2009 as described above.  
 
Under the terms of the Amended Optimus Purchase Agreement, from time to time and at the Company’s sole discretion, the Company can present Optimus with a notice to purchase shares of Series C Preferred Stock (“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 and trading on a trading market, (ii) the representations and warranties of the Company set forth in the Amended Optimus Purchase Agreement are true and correct as if made on each tranche date, and (iii) that no such purchase would result in Optimus and its affiliates beneficially owning more than 9.99% of the Company’s common stock. In the event the closing bid price of the Company’s common stock during any one or more of the nineteen trading days following the delivery of a Notice 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 nineteen trading day period.  
 
On March 14, 2011, the Company delivered a Notice to Optimus to sell 140 shares of Series C Preferred Stock for a purchase price of approximately $1.4 million. In support of this tranche, R & R loaned 2,729,452 shares of common stock, Mr. Silverman loaned 70,548 shares of common stock, and William Caragol, the Company’s Chief Executive Officer, loaned 700,000 shares of common stock to Optimus (the “Loaned Shares). On April 12, 2011, the tranche closed and the Company received proceeds of approximately $1.4 million, less $100,000 paid to Optimus to waive the requirement under the Amended Optimus Purchase Agreement that the conversion price of the Series C Preferred Stock issued in the tranche be reset at the lowest closing bid price for the nineteen trading days following the tranche notice date, which was March 14, 2011, due to the closing bid price of a share of the Company’s common stock falling below 75% during such nineteen trading day period.
 
 
10

 
 
POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
 
On October 12, 2011, R & R, Mr. Caragol and Mr. Silverman demanded the return of the Loaned Shares from Optimus. Also on October 12, 2011, the Company sent Optimus a notice of its election to convert all of the outstanding shares of Series C Preferred Stock into 3,500,000 shares of common stock. The conversion of the Series C Preferred Stock was determined by a fixed conversion price that was determined at the time of the tranche closing, which was approximately $0.40 per share. On October 17, 2011, Optimus failed to return the Loaned Shares within three trading days of the demand by R & R, Mr. Caragol and Mr. Silverman as required under the terms of the Amended Optimus Purchase Agreement. R&R, Mr. Caragol and Mr. Silverman are currently in possession of the stock certificates representing the shares underlying the Series C Preferred Stock since such shares were pledged to them as collateral under the stock loan agreements.

Socius Financing
 
On April 28, 2010, the Company entered into a Preferred Stock Purchase Agreement (the “Socius 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. Under the terms of the Socius 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 (“Preferred Notice”). Socius Technology was obligated to purchase such Series B 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 and trading on a trading market, (ii) the representations and warranties of the Company set forth in the Socius 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 Series B Preferred Stock, holders of Series B Preferred Stock were entitled to receive dividends on each outstanding share of Series B Preferred Stock, which accrues in shares of Series B Preferred Stock at a rate equal to 10% per annum from the date of issuance. Accrued dividends were to be payable upon redemption of the Series B Preferred Stock.
 
On April 28, 2010, the Company also entered into a Stock Purchase Agreement (the “Socius Stock 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 Socius Preferred Purchase Agreement or the warrants, or if there were any shares of Series B 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 Company’s 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 Socius Stock Agreement would exceed 19.99% of the Company’s outstanding common stock.
 
 
11

 
 
POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
 
On April 29, 2010, the Company presented Socius Technology with a Preferred Notice to purchase $2.3 million of Series B Preferred Stock in a Preferred Tranche. Upon the closing of the Preferred Tranche, the Company issued 230 shares of Series B Preferred Stock. In connection with the Preferred Notice, the Company also presented Socius with a notice to purchase $2.3 million of common stock. The Company issued 1,716,417 shares of common stock at an Investment Price of $1.34 per share, paid in the form a secured promissory note, and warrants to purchase 600,746 shares of common stock to Socius, at an exercise price equal to the Investment Price of $1.34 per share, which warrants Socius exercised on April 29, 2010 and paid in the form of a secured promissory note. The promissory note was secured by the shares of Series B Preferred Stock issued to Socius.
 
On January 13, 2011, the Company presented Socius Technology with a Preferred Notice to purchase approximately $1.7 million of Series B Preferred Stock in a Preferred Tranche.  Upon the closing of the Preferred Tranche, the Company issued 168 shares of Series B Preferred Stock. In connection with the Preferred Notice the Company also presented Socius with a notice to purchase $1.7 million of common stock. The Company issued 2,434,783 shares of common stock at an Investment Price of $0.69 per share, paid in the form of a secured promissory note, and warrants to purchase 852,174 shares of common stock to Socius, at an exercise price equal to the Investment Price of $0.69 per share, which warrants Socius exercised on January 13, 2011 and paid in the form of a secured promissory note. The promissory note was secured by the shares of Series B Preferred Stock issued to Socius.

On January 28, 2011, the Company presented Socius Technology with a Preferred Notice to purchase approximately $0.2 million of Series B Preferred Stock in a Preferred Tranche.  Upon the closing of the Preferred Tranche, the Company issued 22 shares of Series B Preferred Stock. In connection with the Preferred Notice, the Company also presented Socius with a notice to purchase $0.2 million of common stock. The Company issued 285,714 shares of common stock at an Investment Price of $0.77 per share, paid in the form of a secured promissory note, and warrants to purchase 100,000 shares of common stock to Socius, at an exercise price equal to the Investment Price of $0.77 per share, which warrants Socius exercised on January 28, 2011 and paid in the form of a secured promissory note. The promissory note was secured by the shares of Series B Preferred Stock issued to Socius.
 
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 redemption price of $4.2 million and a premium for early redemption of $1.3 million. The consideration for the redemption was the cancelation of the promissory notes which were equal to the value of the Series B Preferred Stock held by Socius and any accrued dividends due and owing on the shares redeemed. On August 11, 2011, 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 B Preferred Stock.
 
Ironridge Financings
 
On July 27, 2011, the Company entered into a Preferred Stock Purchase Agreement (the “Series F Agreement”) with Ironridge Global III, LLC, a Delaware limited liability company (“Ironridge Global”), under which Ironridge Global was committed to purchase for cash up to $1.5 million in shares of the Company’s redeemable, convertible Series F Preferred Stock (the “Series F Preferred Stock”) at $1,000 per share of Series F Preferred Stock.  The Series F Preferred Stock is convertible into shares of the Company’s common stock at the option of the holder at a fixed conversion price of $0.50 per common share. The conversion price if the Company elects to convert the Series F Preferred Stock is subject to adjustment based on the market price of the Company's common stock and any applicable early redemption price at the time the Company converts.

Ironridge Global's obligation to purchase the Series F Preferred Stock is subject to satisfaction of certain closing conditions, including (i) that the Company’s common stock is listed and trading on a trading market, (ii) no uncured default exists under the Series F Agreement, (iii) the Company’s representations and warranties set forth in the Series F Agreement are true and correct in all material respects; and (iv) the trading price of the Company’s common stock has not fallen below 70% of the closing price on the trading day immediately before the date it announced that it entered into the Series F Agreement (the “Condition”).

Under the terms of the Series F Agreement, as amended on August 12, 2011 pursuant to that certain Waiver between the parties (the “Waiver”), and from time to time and at the Company’s sole discretion, the Company may present Ironridge Global with a notice to purchase such Series F Preferred Stock.  Upon receipt of a notice, Ironridge Global was obligated to purchase the Series F Preferred Stock in installments as follows: (i) $500,000 on August 15, 2011; (ii) $500,000 on the earlier of (1) 20 trading days after August 15, 2011 and (2) the number of trading days necessary for an aggregate of $2.0 million of the Company’s common stock to trade on the NASDAQ Capital Market; and (iii) $500,000 on the earlier of (1) 20 trading days after the closing of the second tranche above, (2) the number of trading days necessary for an aggregate of $2.0 million of the Company’s common stock to trade on the NASDAQ Capital Market subsequent to the closing of the second tranche above, and (3) September 26, 2011, with the requirement that cash for that tranche be received by the Company on or before September 30, 2011. On August 15, 2011, Ironridge funded the first $500,000 installment, pursuant to which the Company issued 500 shares of Series F Preferred Stock to Ironridge.
 
 
12

 
 
POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
 
On September 16, 2011, the Company entered into a First Amendment to Preferred Stock Purchase Agreement (the “First Amendment”) with Ironridge Global, which superseded the Waiver. Purusant to the First Amendment, Ironridge is obligated to purchase the Series F Preferred Stock in installments as follows: (1) 130 preferred shares on the trading day (“First Closing”) following the later of (i) 10 trading days after September 7, 2011 and (ii) the trading day that aggregate trading volume of the Company's common stock after September 7, 2011, as reported by Bloomberg, equals or exceeds $500,000; (2) 290 preferred shares on the trading day (“Second Closing”) the earlier of (i) 10 trading days after the First Closing and (ii) the trading day that aggregate trading volume of the Company's common stock after the First Closing, as reported by Bloomberg, equals or exceeds $1 million; (3) 290 preferred shares on the trading day (“Third Closing”) following the earlier of (i) 10 trading days after the Second Closing and (ii) the trading day that aggregate trading volume of the Company's common stock after the Second Closing, as reported by Bloomberg, equals or exceeds $1 million; and (4) 290 preferred shares on the trading day (“Fourth Closing”) following the earlier of (i) 10 trading days after the Third Closing and (ii) the trading day that aggregate trading volume of the Company's common stock after the Third Closing, as reported by Bloomberg, equals or exceeds $1 million (each of the First, Second, Third and Fourth Closings, a “Purchase Closing”). Each of the respective time periods between each Purchase Closing and the prior Purchase Closing shall be the respective “Calculation Period.”

If the sole condition precedent to a Purchase Closing not satisfied is that the Condition is not met, the Company may, at its sole option, elect at any time to proceed with an alternate Purchase Closing, in which case, with respect to such Purchase Closing:

 
The Condition will not apply with respect to that Purchase Closing;
 
The Calculation Period will (i) commence on the trading day after Ironridge Global receives written notice of Company’s election, and (ii) exclude any trading day on which the Company’s common stock trades below $0.20 per share; and
 
The price per preferred share will be equal to the lesser of (a) $1,000, and (b) an amount equal to (i) $1,000, multiplied by (ii) 85% of the average of the daily volume-weighted average prices (the “VWAP”) during the Calculation Period, divided by (iii) $0.257.
 
Pursuant to the First Amendment, the price per preferred share with respect to the First Closing was equal to the lesser of: (a) $1,000; and (b) an amount, not below zero, equal to (i) $1,000, multiplied by (ii) 85% of the average of the VWAPs during the period between September 7, 2011 through the First Closing minus $0.20, divided by (iii) $0.057. The First Closing occurred on September 20, 2011, pursuant to which the Company issued 130 shares of Series F Preferred Stock to Ironridge for a nominal purchase price.

On November 14, 2011, the Second Closing occurred, pursuant to which the Company issued 290 shares of Series F Preferred Stock to Ironridge for a purchase price of approximately $193,000. To date, the Company has issued a total of 920 shares of Series F Preferred Stock to Ironridge under the Series F Agreement.
 
Certificate of Designations for Series F Preferred Stock

On July 27, 2011, the Company filed a Certificate of Designations of Preferences, Rights and Limitations of Series F Preferred Stock (the “Series F 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 Series F Preferred Stock will, with respect to dividend rights and rights upon liquidation, winding-up or dissolution, rank: (a) senior with respect to dividends and pari passu in right of liquidation with the Company’s common stock; (b) junior in right of dividends and liquidation with respect to the Series C Preferred Stock; and (c) junior to all existing and future indebtedness of the Company. Holders of Series F Preferred Stock have no voting rights and no preemptive rights. There are no sinking-fund provisions applicable to the Series F Preferred Stock.
 
Dividends and Other Distributions. Commencing on the date of issuance of any such shares of Series F Preferred Stock, holders of Series F Preferred Stock are entitled to receive dividends on each outstanding share of Series F Preferred Stock, which accrue in shares of Series F Preferred Stock at a rate equal to 7.65% per annum from the date of issuance.  Accrued dividends are payable upon redemption of the Series F Preferred Stock.
 
Liquidation. Upon any liquidation, dissolution or winding up after payment or provision for payment of the Company’s debts and other liabilities, pari passu with any distribution or payment made to the holders of the Company’s common stock, the holders of Series F Preferred Stock shall be entitled to be paid out of the Company’s assets available for distribution to the Company’s stockholders an amount with respect to the Series F Liquidation Value, as defined below, after which any of the Company’s remaining assets will be distributed among the holders of the Company’s other classes or series of stock in accordance with its Certificates of Designations and Second Amended and Restated Certificate of Incorporation, as amended.
 
 
13

 
 
POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
 
Redemption . The Company may redeem the Series F Preferred Stock, for cash or by an offset against any outstanding note payable from Ironridge Global to the Company that Ironridge Global issued, as follows.  The Company may redeem any or all of the Series F Preferred Stock at any time after the seventh anniversary of the issuance date at the redemption price per share equal to $1,000 per share of Series F Preferred Stock, plus any accrued but unpaid dividends with respect to such shares of Series F Preferred Stock (the “Series F Liquidation Value”).  Prior to the seventh anniversary of the issuance of the Series F Preferred Stock, the Company may redeem the shares at any time after six months from the issuance date at a make-whole price per share equal to the following with respect to such redeemed Series F Preferred Stock: (i) 149.99% of the Series F Liquidation Value if redeemed prior to the first anniversary of the issuance date, (ii) 141.6% of the Series F Liquidation Value if redeemed on or after the first anniversary but prior to the second anniversary of the issuance date, (iii) 133.6% of the Series F Liquidation Value if redeemed on or after the second anniversary but prior to the third anniversary of the issuance date,  (iv) 126.1% of the Series F Liquidation Value if redeemed on or after the third anniversary but prior to the fourth anniversary of the issuance date, (v) 119.0% of the Series F Liquidation Value if redeemed on or after the fourth anniversary but prior to the fifth anniversary of the issuance date, (vi) 112.3% of the Series F Liquidation Value if redeemed on or after the fifth anniversary but prior to the sixth anniversary of the issuance date, and  (vii) 106.0% of the Series F Liquidation Value if redeemed on or after the sixth anniversary but prior to the seventh anniversary of the issuance date.
 
In addition, if the Company determines to liquidate, dissolve or wind-up its business, or engage in any deemed liquidation event, it must redeem the Series F Preferred Stock at the applicable early redemption price set forth above.
 
Conversion.   The Series F Preferred Stock is convertible into shares of the Company’s common stock at Ironridge Global's option or at the Company’s option at any time after six months from the date of issuance of the Series F Preferred Stock.  The fixed conversion price is equal to $0.50 per share which represented a premium of 32% over the closing price of the Company’s common stock on the trading day immediately before the date the Company announced the entry into the Series F Agreement (the “Series F Conversion Price”).
 
If Ironridge Global elects to convert, the Company will issue that number of shares of its common stock equal to the Series F Liquidation Value multiplied by the number of shares subject to conversion, divided by the Series F Conversion Price.  
 
If the Company elects to convert the Series F Preferred Stock into common stock and the closing bid price of the Company’s common stock exceeds 150% of the Series F Conversion Price for any 20 consecutive trading days, the Company will issue that number of shares of its common stock equal to the early redemption price set forth above multiplied by the number of shares subject to conversion, divided by the Series F Conversion Price.  If the Company elects to convert the Series F Preferred Stock into common stock and the closing bid price of the Company’s common stock is less than 150% of the Series F Conversion Price, the Company will issue an initial number of shares of its common stock equal to 130% of the early redemption price set forth above multiplied by the number of shares subject to conversion, divided by the lower of (i) the Series F Conversion Price and (ii) 100% of the closing bid price of a share of the Company’s common stock on the trading day immediately before the date of the conversion notice.  
 
After 20 trading days, Ironridge Global shall return, or the Company shall issue, a number of conversion shares (the “Series F Reconciling Conversion Shares”), so that the total number of conversion shares under the conversion notice equals the early redemption price set forth above multiplied by the number of shares of subject to conversion, divided by the lower of (i) the Series F Conversion Price and (ii) 85% of the average of the daily volume-weighted average prices of the Company’s common stock for the 20 trading days following Ironridge Global's receipt of the conversion notice.  However, if the trading price of the Company’s common stock during any one or more of the 20 trading days following Ironridge Global's receipt of the conversion notice falls below 70% of the closing bid price on the day prior to the date the Company gives notice of its intent to convert, Ironridge Global will return the Series F Reconciling Conversion Shares to the Company and the pro rata amount of the conversion notice will be deemed canceled.
 
The Company cannot issue any shares of common stock upon conversion of the Series F Preferred Stock if it would result in Ironridge Global being deemed to beneficially own, within the meaning of Section 13(d) of the Securities Exchange Act, more than 9.99% of the total shares of common stock then outstanding.  Furthermore, until stockholder approval is obtained or the holder obtains an opinion of counsel reasonably satisfactory to the Company and its counsel that such approval is not required, both the holder and the Company are prohibited from delivering a conversion notice if, as a result of such exercise, the aggregate number of shares of common stock to be issued, when aggregated with any common stock issued to holder or any affiliate of holder under any other agreements or arrangements between the Company and the holder or any applicable affiliate of the holder, such aggregate number would, under NASDAQ Marketplace rules (or the rules of any other exchange where the common stock is listed), exceed the Cap Amount (meaning 19.99% of the common stock outstanding on the date of the Series F Agreement). If delivery of a conversion notice is prohibited by the preceding sentence because the Cap Amount would be exceeded, the Company must, upon the written request of the holder, hold a meeting of its stockholders within sixty (60) days following such request, and use its best efforts to obtain the approval of its stockholders for the transactions described herein.
 
 
14

 
 
POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
 
Common Stock Purchase Agreement
 
On July 27, 2011, the Company also entered into a Common Stock Purchase Agreement (the “Common Stock Agreement”) with Ironridge Global Technology, a division of Ironridge Global IV, Ltd. (“Ironridge”), under which the Company could deliver a notice to Ironridge exercising its right to require Ironridge to purchase shares up to $2.5 million of its common stock at a price per share equal to $0.367.  The purchase price is equal to 102% of the per share closing bid price of the Company’s common stock as reported on the NASDAQ Capital Market on the trading day immediately before the date the Company announced that it entered into the Common Stock Agreement, which was July 27, 2011.  
 
Ironridge could pay the purchase price for the shares, at Ironridge's option, in cash or a secured promissory note, except that at least $250,000 of the purchase price was required to be paid in cash. The promissory note bears interest at 1.6% per year calculated on a simple interest basis. The entire principal balance and interest thereon is due and payable seven and one-half years from the date of the promissory note, but no payments are due so long as the Company is in default under the Common Stock Agreement or the Series F Agreement or if there are any shares of Series F Preferred Stock issued or outstanding. The promissory note is secured by Ironridge's right, title and interest in all shares legally or beneficially owned by Ironridge or an affiliate, common stock and other securities with a fair market value equal to the principal amount of the promissory note.
 
The Company’s right to deliver a tranche notice to Ironridge pursuant to the Common Stock Agreement was subject to satisfaction of certain closing conditions, including (i) that the Company’s common stock is listed and trading on a trading market, (ii) no uncured default exists under the Common Stock Agreement, and (iii) the Company’s representations and warranties set forth in the Common Stock Agreement are true and correct in all material respects.  The Company may not deliver a notice to Ironridge to purchase shares of its common stock if the total number of shares of common stock owned or deemed beneficially owned by Ironridge and its affiliates would result in Ironridge owning or being deemed to beneficially own more than 9.99% of all such common stock and other voting securities as would be outstanding on the date of exercise.
 
On July 28, 2011, the Company presented Ironridge with a notice to purchase $2.5 million of its common stock under the Common Stock Agreement.  Ironridge Global paid $250,000 in cash and the remaining $2.25 million in a promissory note, the terms of which are described above.  The Company issued an aggregate of 6,811,989 shares of its common stock to Ironridge in connection with the July 28, 2011 notice. No further shares may be sold under the Common Stock Agreement.

Stock Purchase Agreement
 
On July 27, 2011, the Company also entered into a Stock Purchase Agreement (the “Series G Agreement”) with Ironridge under which Ironridge is committed to purchase for cash up to $4 million in shares of the Company’s redeemable, convertible Series G Preferred Stock (the “Series G Preferred Stock”) at $1,000 per share of Series G Preferred Stock in ten transactions of $400,000 each and up to $5.75 million in shares of the Company’s common stock at a price per share equal to 102% of the per share closing bid price of the Company’s common stock as reported on the principal trading exchange or market for the Company's common stock at the time, on the trading day immediately before the date the Company delivers notice to purchase shares of Series G Preferred Stock.
 
Under the terms of the Series G Agreement, from time to time and at the Company’s sole discretion, the Company may present Ironridge with a notice to purchase such Series G Preferred Stock.  Upon receipt of a notice, Ironridge is obligated to purchase the Series G Preferred Stock the business day immediately following the later of 15 trading days and the trading date that the aggregate trading volume of the Company’s shares of common stock equals or exceeds $1.2 million.
 
Ironridge will have an additional obligation to purchase shares of the Company’s common stock in an amount equal to $575,000 whenever the Company presents Ironridge with a notice to purchase the Series G Preferred Stock.  Ironridge may pay the purchase price for the shares, at Ironridge's option, in cash or a secured promissory note. The promissory note bears interest at 1.6% per year calculated on a simple interest basis. The entire principal balance and interest thereon is due and payable seven and one-half years from the date of the promissory note, but no payments are due so long as the Company is in default under the Series G Agreement or if there are any shares of Series G Preferred Stock issued or outstanding. The promissory note is secured by the borrower’s right, title and interest in all shares of Series G Preferred Stock legally or beneficially owned by Ironridge or an affiliate, common stock and other securities with a fair market value equal to the principal amount of the promissory note.
 
 
15

 
 
POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
 
Ironridge's obligation to purchase Series G Preferred Stock is subject to satisfaction of certain closing conditions, including (i) that the registration statement registering the resale of the Company’s common stock is effective, (ii) that the Company’s common stock is listed and trading on a trading market, (iii) no uncured default exists under the Series G Agreement, (iv) the Company’s representations and warranties set forth in the Series G Agreement are true and correct in all material respects, and (v) the trading price of the Company’s common stock has not fallen below 70% of the closing bid price on the trading day immediately before the date the Company delivered a notice to purchase shares of Series G Preferred Stock.  If the trading price falls below 70% of such closing bid price, Ironridge will return any remaining common stock under the notice and purchase the pro rata number of Series G Preferred Stock, based on the common stock unreturned.
 
Certificate of Designations for Series G Preferred Stock
 
On July 27, 2011, the Company filed a Certificate of Designations of Preferences, Rights and Limitations of Series G Preferred Stock (the “Series G 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 Series G Preferred Stock will, with respect to dividend rights and rights upon liquidation, winding-up or dissolution, rank: (a) senior with respect to dividends and pari passu in right of liquidation with the Company’s common stock; (b) junior in right of dividends and liquidation with respect to the Series C Preferred Stock; (c) pari passu in right of dividends and liquidation with respect to the Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock; and (d) junior to all existing and future indebtedness of the Company. Holders of Series G Preferred Stock have no voting rights and no preemptive rights. There are no sinking-fund provisions applicable to the Series G Preferred Stock.
 
Dividends and Other Distributions. Commencing on the date of issuance of any such shares of Series G Preferred Stock, holders of Series G Preferred Stock are entitled to receive dividends on each outstanding share of Series G Stock, which accrue in shares of Series G Preferred Stock at a rate equal to 7.00% per annum from the date of issuance.   Accrued dividends are payable upon redemption of the Series G Preferred Stock.
 
Liquidation. Upon any liquidation, dissolution or winding up after payment or provision for payment of the Company’s debts and other liabilities, pari passu with any distribution or payment made to the holders of the Company’s common stock, the holders of Series G Preferred Stock shall be entitled to be paid out of the Company’s assets available for distribution to the Company’s stockholders an amount with respect to the Series G Liquidation Value, as defined below, after which any of the Company’s remaining assets will be distributed among the holders of the Company’s other classes or series of stock in accordance with its Certificates of Designations and Second Amended and Restated Certificate of Incorporation, as amended.
 
Redemption . The Company may redeem the Series G Preferred Stock, for cash or by an offset against any outstanding note payable from Ironridge to the Company that Ironridge issued, as follows.  The Company may redeem any or all of the Series G Preferred Stock at any time upon or after the seventh anniversary of the issuance date at the redemption price per share equal to $1,000 per share of Series G Preferred Stock, plus any accrued but unpaid dividends with respect to such shares of Series G Preferred Stock (the “Series G Liquidation Value”).  Prior to the seventh anniversary of the issuance of the Series G Preferred Stock, the Company may redeem the shares at any time after six months from the issuance date at a make-whole price per share equal to the following with respect to such redeemed Series G Preferred Stock: (i) 143.8% of the Series G Liquidation Value if redeemed prior to the first anniversary of the issuance date, (ii) 136.5% of the Series G Liquidation Value if redeemed on or after the first anniversary but prior to the second anniversary of the issuance date, (iii) 129.6% of the Series G Liquidation Value if redeemed on or after the second anniversary but prior to the third anniversary of the issuance date, (iv) 123.1% of the Series G Liquidation Value if redeemed on or after the third anniversary but prior to the fourth anniversary of the issuance date, (v) 116.9% of the Series G Liquidation Value if redeemed on or after the fourth anniversary but prior to the fifth anniversary of the issuance date, (vi) 111.0% of the Series G Liquidation Value if redeemed on or after the fifth anniversary but prior to the sixth anniversary of the issuance date, and (vii) 105.4% of the Series G Liquidation Value if redeemed on or after the sixth anniversary but prior to the seventh anniversary of the issuance date.
 
In addition, if the Company determines to liquidate, dissolve or wind-up its business, or engage in any deemed liquidation event, it must redeem the Series G Preferred Stock at the applicable early redemption price set forth above.
 
 
16

 
 
POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
 
Conversion.   The Series G Preferred Stock is convertible into shares of the Company’s common stock at the Company’s option at any time after six months from the date of issuance of the Series G Preferred Stock.  The conversion price is equal to the higher of $0.50 per share of the Company's common stock and 130% of the closing price of the Company’s common stock on the trading day immediately before the date the Company delivers notice to purchase shares of Series G Preferred Stock (the “Series G Conversion Price”).  
 
If the Company elects to convert the Series G Preferred Stock into common stock and the closing price of the Company’s common stock exceeds 150% of the Series G Conversion Price for any 20 consecutive trading days, the Company will issue that number of shares of its common stock equal to the early redemption price set forth above multiplied by the number of shares subject to conversion, divided by the Series G Conversion Price.  If the Company elects to convert the Series G Preferred Stock into common stock and the closing price of the Company’s common stock is less than 150% of the Series G Conversion Price, the Company will issue an initial number of shares of its common stock equal to 130% of the early redemption price set forth above multiplied by the number of shares subject to conversion, divided by the lower of (i) the Series G Conversion Price and (ii) 100% of the closing price of a share of the Company’s common stock on the trading day immediately before the date of the conversion notice.
 
After 20 trading days, Ironridge shall return, or the Company shall issue, a number of conversion shares (the “Series G Reconciling Conversion Shares”), so that the total number of conversion shares under the conversion notices equals the early redemption price set forth above multiplied by the number of shares of subject to conversion, divided by the lower of (i) the Series G Conversion Price and (ii) 85% of the average of the daily volume weighted average prices of the Company’s common stock for the 20 trading days following Ironridge's receipt of the conversion notice.  However, if the trading price of the Company’s common stock during any one or more of the 20 trading days following Ironridge's receipt of the conversion notice falls below 70% of the closing price on the day prior to the date the Company gives notice of its intent to convert, Ironridge will return the Series G Reconciling Conversion Shares to the Company and the pro rata amount of the conversion notice will be deemed canceled.
 
The Company cannot issue any shares of common stock upon conversion of the Series G Preferred Stock if it would result in Ironridge being deemed to beneficially own, within the meaning of Section 13(d) of the Securities Exchange Act, more than 9.99% of the total shares of common stock then outstanding.  Furthermore, until stockholder approval is obtained or the holder obtains an opinion of counsel reasonably satisfactory to the Company and its counsel that such approval is not required, the Company is prohibited from delivering a conversion notice if, as a result of such exercise, the aggregate number of shares of common stock to be issued, when aggregated with any common stock issued to holder or any affiliate of holder under any other agreements or arrangements between the Company and the holder or any applicable affiliate of the holder, such aggregate number would, under NASDAQ Marketplace rules (or the rules of any other exchange where the common stock is listed), exceed the Cap Amount (meaning 19.99% of the common stock outstanding on the date of the Series G Agreement). If delivery of a conversion notice is prohibited by the preceding sentence because the Cap Amount would be exceeded, the Company must, upon the written request of the holder, hold a meeting of its stockholders within sixty (60) days following such request, and use its best efforts to obtain the approval of its stockholders for the transactions described herein.

5. Stock-Based Compensation
 
On August 26, 2011, the Company’s stockholders approved and adopted the PositiveID Corporation 2011 Stock Incentive Plan (the “2011 Plan”). The 2011 Plan provides for awards of incentive stock options, nonqualified stock options, restricted stock awards, performance units, performance shares, SARs and other stock-based awards to employees and consultants. Under the 2011 Plan, up to 6.0 million shares of common stock may be granted pursuant to awards.

A summary of option activity under the Company’s option plans as of September 30, 2011, and changes during the nine months then ended is presented below (in thousands, except per share amounts):
 
 
17

 
 
POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
 
           
Weighted Average
 
   
Number of
   
Exercise Price
 
   
Options
   
Per Share
 
Outstanding at January 1, 2011
   
3,216
   
$
2.03
 
Granted
   
1,285
   
$
0.24
 
Exercised
   
   
$
 
Forfeited
   
(27)
   
1.38
 
Outstanding at September 30, 2011
   
4,474
   
$
1.52
 
Exercisable at September 30, 2011
   
3,170
   
2.03
 
                 
Shares available for grant at September 30, 2011
   
5,986
         
 
The Black-Scholes model, which the Company uses to determine compensation expense related to stock options, requires the Company to make several key judgments including:

 
the value of the Company’s common stock;
 
the expected life of issued stock options;
 
the expected volatility of the Company’s stock price;
 
the expected dividend yield over the life of the stock option; and
 
the risk-free interest rate over the expected life of the stock options.
 
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 Company’s computation of the expected life of issued stock options was determined based on historical experience of similar awards giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations about employees’ future length of service. The interest rate was based on the U.S. Treasury yield curve in effect at the time of grant. The computation of volatility is based on the historical volatility of the Company’s common stock.
 
A summary of restricted stock outstanding as of September 30, 2011 and changes during the nine months then ended is presented below (in thousands):
 
Unvested at January 1, 2011
   
6,623
 
Issued
   
370
 
Vested
   
(2,608)
 
Forfeited
   
 
Unvested at September 30, 2011
   
4,385
 

The Company recorded compensation expense related to stock options and restricted stock of approximately $669,000 and $2,219,000 for the three and nine months ended September 30, 2011, respectively.
 
In February 2011, the Company authorized the grant of 220,000 shares of restricted stock to a member of its Board of Directors, of which 20,000 shares are scheduled to vest through December 2011 and 200,000 shares are scheduled to vest in January 2012. The Company determined the value of the restricted stock to be approximately $121,000 based on the value of its common stock on the date of grant. The value of the restricted stock is being amortized as compensation expense over the vesting period. The Company recorded compensation expense of approximately $33,000 and $94,000 in the three and nine months ended September 30, 2011, respectively, related to this stock.
 
In February 2011, the Company authorized the grant of 125,000 shares of its common stock to a research and development project partner, which was fully vested on the date of grant. The Company determined the value of the stock to be approximately $71,000 based on the value of its common stock on the date of grant and recorded the full amount as compensation expense in the quarter ended March 31, 2011.
 
 
18

 
 
POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
 
In March 2011, the Company authorized the grant of 65,000 shares of its common stock to an advisor, which was fully vested on the date of grant. The Company determined the value of the stock to be approximately $30,000 based on the value of its common stock on the date of grant and recorded the full amount as compensation expense in the quarter ended March 31, 2011.
 
In March 2011, the Company authorized the grant of 100,000 shares of its common stock to an employee, which was fully vested on the date of grant. The Company determined the value of the stock to be approximately $47,000 based on the value of its common stock on the date of grant and recorded the full amount as compensation expense in the quarter ended March 31, 2011.
 
In May 2011, the Company authorized the grant of 50,000 shares of its common stock to an employee, which was fully vested on the date of grant. The Company determined the value of the stock to be approximately $19,000 based on the value of its common stock on the date of grant and recorded the full amount as compensation expense in the quarter ended June 30, 2011.

In August 2011, the Company authorized the grant of 50,000 shares of its common stock to a consultant, which was fully vested on the date of grant. The Company determined the value of the stock to be approximately $12,000 based on the value of its common stock on the date of grant and recorded the full amount as compensation expense in the quarter ended September 30, 2011.

  6. Income Taxes
 
The Company had an effective tax rate of nil for the nine months ended September 30, 2011 and 2010. The Company incurred losses before taxes for the nine months ended September 30, 2011 and 2010. However, it has not recorded a tax benefit for the resulting net operating loss carryforwards, as the Company has determined that a full valuation allowance against its net deferred tax assets was appropriate based primarily on its historical operating results.
 
In January 2010, Stanley Canada Corporation (“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 September 30, 2011 it has adequately accrued for this contingency.
 
7. Legal Proceedings
 
The Company is a party to certain legal actions, as either plaintiff or defendant, arising in the ordinary course of business, none of which is expected to have a material adverse effect on the Company’s business, financial condition or results of operations. However, litigation is inherently unpredictable, and the costs and other effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings, whether civil or criminal, settlements, judgments and investigations, claims or charges in any such matters, and developments or assertions by or against the Company relating to the Company or to the Company’s intellectual property rights and intellectual property licenses could have a material adverse effect on the Company’s business, financial condition and operating results.

8. Nasdaq Delisting
 
The Company has been out of compliance with Nasdaq’s minimum bid price requirement since the second half of 2010. As of June 30, 2011, the Company did not meet the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market. On August 11, 2011, the Company was granted a temporary extension of time, as permitted under Nasdaq's Listing Rules, to comply with the $1.00 per share minimum bid price requirement for continued listing, which is typically accomplished by means of a reverse stock split. On August 26, 2011, the Company received the requisite favorable vote of the Company’s stockholders with respect to the proposal to authorize the Board of Directors of the Company (the “Board”), in its discretion, to amend the Company’s certificate of incorporation to effect a reverse stock split of the Company’s common stock; however, for various reasons, the Board decided to not effect a reverse stock split.
 
 
19

 
 
POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
 
On August 31, 2011, the Company received notification that the Company's stock was being delisted from the Nasdaq Capital Market in connection with a bid price deficiency. On September 1, 2011, the Company’s common stock began trading on the OTC Bulletin Board under the trading symbol PSID. The Company will continue to file periodic reports with the SEC in accordance with the requirements of Section 12(g) of the Securities Exchange Act of 1934, as amended.

9. Stock Compensation to Related Party

On September 30, 2011, the Company entered into a First Amendment to Employment and Non-Compete Agreement (the “First Amendment”) with Scott R. Silverman in connection with Mr. Silverman’s ceasing to be the Company’s Chief Executive Officer. The First Amendment amends the Employment and Non-Compete Agreement dated November 11, 2010 between the Company and Mr. Silverman and provides for, among other things, the issuance of restricted stock of the Company to Mr. Silverman in the aggregate amount of approximately $3.4 million (the “Restricted Stock”) in lieu of contractually-committed cash salary and bonus for 2012 through 2015. The Restricted Stock will be issued based upon the average daily volume-weighted average price of the Company’s common stock for the five trading days preceding the date of the First Amendment, pursuant to which the Company expects to issue approximately 18.1 million shares of common stock to Mr. Silverman. The Restricted Stock is subject to registration rights and price protection provisions, and will be granted upon the earlier of (i) a reverse stock split or (ii) the receipt of stockholder approval to increase the number of authorized shares of common stock of the Company under the Company’s Second Amended and Restated Certificate of Incorporation, as amended, to at least 175 million shares of common stock. In connection with the execution of the First Amendment, a non-cash charge of approximately $3.4 million was recorded in the third quarter of 2011, for which a corresponding liability has been established in the accompanying condensed consolidated balance sheet as of September 30, 2011.

 
20

 
 
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 expect to obtain clearance by the U.S. Food and Drug Administration (“FDA”) of our 510(k) pre-market notification application for our iglucose wireless communication system by the end of 2011 and expect to launch the iglucose product commercially in early 2012;
 
the expectation that operating losses will continue through 2012, and that until we are able to achieve profits, we intend to continue to seek to access the capital markets to fund the development of our HealthID products;
 
that we seek to structure our research and development 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 us to minimize its firm fixed commitments at any given point in time;
 
that based on our review of the correspondence and evaluation of the supporting detail involving the Canada Revenue Agency audit, we do not believe that the ultimate resolution of this dispute will have a material negative impact on our historical tax liabilities, its current financial position or results of operations;
 
that we intend to continue to explore strategic acquisition opportunities of businesses that are complementary to ours; and
 
that we believe that with our current cash resources, our expected access to capital under the Ironridge financing arrangement, and, if necessary, delaying and/or reducing certain research, development and related activities and costs, that we will have sufficient funds available to meet our working capital requirements for the near-term future.

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 GlucoChip glucose-sensing microchip, the Easy Check breath glucose detection system and the iglucose wireless communication system, and the operations of our subsidiary, MicroFluidic Systems;
 
our ability to obtain and 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;
 
 
21

 
 
 
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;
 
the potential for costly product liability claims and claims that our products infringe the intellectual property rights of others;
 
our ability to comply with current and future regulations relating to our businesses;
 
the potential for patent infringement claims to be brought against us asserting that we are violating another party’s intellectual property rights;
 
our ability to complete Phase III of the glucose-sensing microchip development program;
 
our ability to be awarded government contracts on which MicroFluidic Systems bids;
 
our ability to integrate the business of MicroFluidic Systems;
 
our ability to establish and maintain proper and effective internal accounting and financial controls; and
 
our ability to receive cash proceeds from the sale of securities under the Ironridge financings.
 
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.

 
22

 
 
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 further focused our strategy on the growth of our HealthID segment, including the continued development of our GlucoChip, our Easy Check breath glucose detection device, our iglucose wireless communication system, and potential strategic acquisition opportunities of businesses that are complementary to our HealthID business.
 
In May 2011 and consistent with this strategy, we acquired MicroFluidic Systems (“MicroFluidic”), pursuant to which MicroFluidic became a wholly-owned subsidiary of the Company.  MicroFluidic 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. Since its inception, MicroFluidic has received over $45 million in U.S. Government contracts, primarily from the Department of Homeland Security. MicroFluidic’s substantial portfolio of intellectual property related to sample preparation and rapid medical testing applications are complementary to our portfolio of virus detection and diabetes management products.

HealthID Segment
 
Our HealthID segment is currently focused on the development of three 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 data-capable glucometer for blood glucose data and sends that data via machine-to-machine technology to the iglucose online database, and (3) Easy Check, a non-invasive breath glucose detection system, based on the correlation of acetone in exhaled breath to blood glucose levels.
 
In July 2011, we submitted a 510(k) pre-market notification application for our iglucose wireless communication system to the FDA. We expect to obtain clearance by the FDA by the end of 2011 and to launch iglucose commercially in early 2012.

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 included 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 the acquisition of Steel Vault in November 2009. NationalCreditReport.com offered consumers a variety of identity security products and services primarily on a subscription basis. These services helped consumers protect themselves against identity theft or fraud and understand and monitor their credit profiles and other personal information, which included credit reports, credit monitoring and credit scores. In the first quarter of 2010, the Company re-launched its Health Link PHR business. The Company focused its marketing efforts on partnering with health care providers and exchanges, physicians group, Electronic Medical Record system vendors, and insurers to use Health Link as PHR provided to their patients. We are not currently actively marketing the Health Link PHR business.
 
Beginning in early 2011, in conjunction with our focus on our HealthID businesses, we began to limit our activities in our ID Security segment.  In early 2011, we ceased acquiring new subscribers to our NationalCreditReport.com business, and in the second quarter of 2011 we began actively marketing the business for sale. In July 2011, we completed the sale of substantially all of the assets of NationalCreditReport.com for a cash purchase price of $750,000.
 
 
23

 
 
Results of Operations
 
Overview
 
As a result of the sale of our NationalCreditReport.com business in July 2011, we now operate in one segment (HealthID). In connection with our decision to sell the NationalCreditReport.com business in the second quarter of 2011, we classified certain assets of the subsidiary as held for sale in our condensed consolidated balance sheet, and have presented its results of operations as discontinued operations in our condensed consolidated statements of operations for all periods presented in this Quarterly Report on Form 10-Q. Since the sale of NationalCreditReport.com, we are not currently generating revenue.
 
Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010
 
Revenue and Gross Profit
 
We reported no revenue or gross profit from continuing operations for the three months ended September 30, 2011 and 2010. Until one or more of the products under development in our HealthID segment is successfully brought to market, we do not anticipate generating significant revenue or gross profit. Further, MicroFluidic reported no revenue or gross profit during the period from the date of acquisition of May 23, 2011 through September 30, 2011 as it had no active contracts during this period. MicroFluidic has submitted, or is the process of submitting, bids on various potential new U.S. Government contracts; however, there can be no assurance that we will be successful in obtaining any such new or other contracts.
 
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 and including stock-based compensation. Other significant costs include depreciation and amortization, professional fees for accounting and legal services, consulting fees and facilities costs.
 
Selling, general and administrative expense increased by approximately $0.2 million, or 7%, for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. The increase was primarily attributable to incremental expense from the MicroFluidic operations and amortization of intangible assets related to the MicroFluidic acquisition, offset in part by a decrease in stock-based compensation for the period.
 
Stock-based compensation included in selling, general and administrative expense totaled approximately $0.7 million and $1.3 million for the three months ended September 30, 2011 and 2010, respectively.
 
Research and Development
 
Our research and development expense consists primarily of costs associated with various projects, including testing, developing prototypes and related expenses. Our research and development costs include payments to our project partners and acquisition of in process research and development.  We seek to structure our research and development on a project basis to allow the management of costs and results on a 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.
 
Research and development expense decreased by approximately $0.1 million, or 32%, for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. The decrease was primarily attributable to a decrease in stock-based compensation to consultants and our research and development project partners.
 
Stock-based compensation included in research and development expense totaled $0 and approximately $22,000 for the three months ended September 30, 2011 and 2010, respectively.
 
 
24

 
 
Stock Compensation to Related Party

In connection with an amendment to our former Chief Executive Officer’s employment agreement relating to his ceasing to be our Chief Executive Officer, we recorded a non-cash charge of approximately $3.4 million in the third quarter of 2011 related to the value of stock to be issued to the individual pursuant to the amendment.

Income (Loss) from Discontinued Operations
 
Income (loss) from discontinued operations relates to the NationalCreditReport.com business sold in July 2011, and totaled a loss of approximately $1.0 million for the three months ended September 30, 2010. Historical revenue related to the NationalCreditReport.com business and included in income (loss) from discontinued operations totaled approximately $44,000 and $1.0 million for the three months ended September 30, 2011 and 2010, respectively.
 
  Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
 
Revenue and Gross Profit
 
For the reasons discussed above, we reported no revenue or gross profit from continuing operations for the nine months ended September 30, 2011 and a minimal level of revenue and gross profit from continuing operations for the nine months ended September 30, 2010.
 
Selling, General and Administrative Expense
 
Selling, general and administrative expense increased by approximately $0.9 million, or 12%, for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. The increase was primarily attributable to incremental expense from the MicroFluidic operations since the date of the acquisition, including approximately $0.5 million of direct costs related to the acquisition, and amortization of intangible assets related to the MicroFluidic acquisition, offset in part by a decrease in stock-based compensation for the period.
 
Stock-based compensation included in selling, general and administrative expense totaled approximately $2.1 million and $3.2 million for the nine months ended September 30, 2011 and 2010, respectively.
 
Research and Development
 
Our research and development expense consists primarily of costs associated with various projects, including testing, developing prototypes and related expenses. Our research and development costs include payments to our project partners and acquisition of in process research and development.  We seek to structure our research and development on a project basis to allow the management of costs and results on a 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.
 
Research and development expense decreased by approximately $0.6 million, or 50%, for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. The decrease was attributable to a decrease in stock-based compensation to consultants and our research and development project partners and a decrease in expensed in-process research and development.
 
Stock-based compensation included in research and development expense totaled approximately $0.1 million and $0.5 million for the nine months ended September 30, 2011 and 2010, respectively.
 
Stock Compensation to Related Party

In connection with an amendment to our former Chief Executive Officer’s employment agreement relating to his ceasing to be our Chief Executive Officer, we recorded a non-cash charge of approximately $3.4 million in the third quarter of 2011 related to the value of stock to be issued to the individual pursuant to the amendment.

 
25

 
 
Loss from Discontinued Operations
 
Loss from discontinued operations totaled approximately $0.1 million and $3.1 million for the nine months ended September 30, 2011 and 2010, respectively. Historical revenue related to the NationalCreditReport.com business and included in the loss from discontinued operations totaled approximately $1.0 million and $2.2 million for the nine months ended September 30, 2011 and 2010, respectively.
 
In connection with the decision to sell the NationalCreditReport.com business, the carrying value of the subsidiary’s net assets was written down to their estimated fair value, determined based upon the proceeds realized upon the sale in July 2011. As a result, an impairment of the carrying value of intangible assets of approximately $0.6 million was recognized during the second quarter of 2011 and is included in the loss from discontinued operations for the nine months ended September 30, 2011.
 
Liquidity and Capital Resources
 
As of September 30, 2011, cash and cash equivalents totaled approximately $0.5 million compared to cash and cash equivalents of approximately $1.8 million at December 31, 2010.
 
Cash Flows from Operating Activities
 
Net cash used in operating activities totaled approximately $5.7 million and $5.6 million during the nine months ended September 30, 2011 and 2010, respectively, primarily to fund operating losses. Net cash used in discontinued operations was approximately $0.5 million and $1.4 million during the nine months ended September 30, 2011 and 2010, respectively.

Cash Flows from Investing Activities
 
Investing activities provided cash of approximately $0.7 million for the nine months ended September 30, 2011, primarily related to proceeds received from the sale of NationalCreditReport.com. Net cash used in investing activities was not significant for the nine months ended September 30, 2011 or 2010.
 
Cash Flows from Financing Activities
 
Financing activities provided cash of approximately $3.7 million and $2.5 million during the nine months ended September 30, 2011 and 2010, respectively, primarily related to proceeds from the issuance of preferred stock under the Socius and Optimus financing agreements, as well as from the issuance of preferred stock under the Ironridge financing agreement in the 2011 period. During the nine months ended September 30, 2010, proceeds from the exercise of stock options provided cash of approximately $0.4 million.
 
Financial Condition
 
As of September 30, 2011, we had a working capital deficiency of approximately $1.4 million and an accumulated deficit of approximately $82 million, compared to working capital of approximately $1.5 million and an accumulated deficit of approximately $70 million as of December 31, 2010. The decrease in working capital was primarily due to operating losses for the period, offset in part by proceeds from the sale of NationalCreditReport.com and capital raised through preferred stock financings.
 
We have incurred operating losses prior to and since the merger that created PositiveID.  The current operating losses are the result of selling, general and administrative expenses and the funding of our development projects and products:  the GlucoChip, the iglucose wireless communications system, and the Easy Check breath analysis device.  Operating losses are also due to salary costs, consulting fees, legal, accounting and other general administrative costs. We expect our operating losses to continue through 2012.
 
Our ability to continue as a going concern is dependent upon our ability to obtain financing to fund the continued development of our HealthID products, the operations of MicroFluidic, and working capital requirements. Until we are able to achieve operating profits, we will continue to seek to access the capital markets.  Since December 31, 2010, we have raised approximately $3.3 million under the Socius and Optimus financing facilities. Additionally, in July 2011, we executed an equity financing with Ironridge that, subject to certain conditions, may provide us with funding of up to $13.8 million, of which approximately $0.8 million has been funded through September 30, 2011.  An aggregate of $9.8 million of the Ironridge financing is, among other things, subject to the effectiveness of a registration statement that we have filed with the SEC, and the amount of funding available under the facility overall is largely dependent upon our stock price and trading volume.

 
26

 
 
We believe that our current cash resources and our expected access to capital under the Ironridge financing arrangement will provide sufficient funds to meet our working capital requirements for the near-term future. In addition and if necessary, we could reduce and/or delay certain discretionary research, development and related activities and costs. However, there can be no assurances that we will be able to derive sufficient funding under the Ironridge facility or be successful in negotiating additional sources of equity or credit for our long-term capital needs.  Our inability to have continuous access to such financing at reasonable costs could materially and adversely impact our financial condition, results of operations and cash flows, and result in significant dilution to our existing stockholders.
 
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 September 30, 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 September 30, 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 September 30, 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 September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
27

 
 
PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

We are 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 our 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 our intellectual property rights and intellectual property licenses could have a material adverse effect on our business, financial condition and operating results.

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. 

We failed to meet applicable Nasdaq Stock Market requirements and as a result our stock was delisted by the Nasdaq Stock Market, which could adversely affect the market liquidity of our common stock and harm our businesses.

We have been out of compliance with Nasdaq’s minimum bid price requirement since the second half of 2010.  As of June 30, 2011, we did not meet the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market. On August 11, 2011, we were granted a temporary extension of time, as permitted under Nasdaq's Listing Rules, to comply with the $1.00 per share minimum bid price requirement for continued listing, which is typically accomplished by means of a reverse stock split. On August 26, 2011, we received the requisite favorable vote of our stockholders with respect to the proposal to authorize our Board of Directors (the “Board”), in its discretion, to amend our certificate of incorporation to effect a reverse stock split of our common stock; however, for various reasons, the Board decided to not effect a reverse stock split.

On August 31, 2011, we received notification that our stock was being delisted from The Nasdaq Capital Market in connection with a bid price deficiency. On September 1, 2011, our common stock began trading on the OTC Bulletin Board under the trading symbol PSID. We will continue to file periodic reports with the Securities and Exchange Commission in accordance with the requirements of Section 12(g) of the Securities Exchange Act of 1934, as amended.
 
Our delisting from Nasdaq could adversely affect the market liquidity of our common stock and harm our business and may hinder or delay our ability to consummate potential strategic transactions or investments. Such delisting could also adversely affect our ability to obtain financing for the continuation of our 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 September 30, 2011, we issued shares of our common stock that were not registered under the Securities Act of 1933, as amended, and were not previously disclosed in a Current Report on Form 8-K as follows: 
 
On September 19, 2011, we issued 121,429 shares of our common stock, valued at approximately $25,000, to Focus Enterprises (and related individuals) for advisory services rendered in connection with the acquisition of MicroFluidic Systems. 
 
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.
 
            None.

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.
 
 
28

 
 
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: November 14, 2011
By:  
/s/ Bryan D. Happ
   
Bryan D. Happ
   
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)

 
29

 
 
Exhibit Index

Exhibit
   
Number
 
Description
2.1
   
Asset Purchase Agreement, dated July 22, 2011, among PositiveID Corporation, National Credit Report.com, LLC and CoreLogic Credco, LLC (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
   
Waiver to Preferred Stock Purchase Agreement, dated August 12, 2011, between PositiveID Corporation and Ironridge Global III, LLC (2)
10.2
   
Preferred Stock Purchase Agreement, dated July 27, 2011, between PositiveID Corporation and Ironridge Global III, LLC for Series F Preferred Stock (4)
10.3
   
Common Stock Purchase Agreement, dated July 27, 2011, between PositiveID Corporation and Ironridge Global IV, Ltd. (4)
10.4
   
Stock Purchase Agreement, dated July 27, 2011, between PositiveID Corporation and Ironridge Global IV, Ltd. for Series G Preferred Stock (4)
10.5
*
 
First Amendment to Preferred Stock Purchase Agreement, dated September 16, 2011, between PositiveID Corporation and Ironridge Global III, LLC for Series F Preferred Stock.
10.6
   
First Amendment to PositiveID Corporation Employment and Non-Compete Agreement, dated September 30, 2011 between PositiveID Corporation and Scott R. Silverman. (5)
10.7
   
Employment and Non-Compete Agreement, dated September 30, 2011 between PositiveID Corporation and Bryan D. Happ. (5)
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
101.INS **   XBRL Instance Document
101.SCH **   XBRL Taxonomy Extension Schema Document
101.CAL **   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF **   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB **   XBRL Taxonomy Extension Label Linkbase Document
101.PRE **   XBRL Taxonomy Extension Presentation Linkbase Document

*
Filed herewith.
** Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
(1)
Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on July 25, 2011.
(2)
Incorporated by reference to the Form 10-Q previously filed by PositiveID Corporation on August 15, 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 July 28, 2011.
(5)
Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on September 30, 2011.
 
 
30
Exhibit 10.5
 
FIRST AMENDMENT TO PREFERRED STOCK PURCHASE AGREEMENT

This First Amendment to Preferred Stock Purchase Agreement (the “First Amendment”), dated September 16, 2011, is entered into between PositiveID Corporation, a Delaware corporation (the “Company”) and Ironridge Global III, LLC, a Delaware limited liability company ("Ironridge").
 
Background

WHEREAS, on July 27, 2011, the Company entered into a Preferred Stock Purchase Agreement (the “Agreement”) with Ironridge under which Ironridge is committed to purchase for cash up to $1.5 million in shares of the Company’s redeemable, convertible Series F Preferred Stock (the “Series F Preferred Stock”) at $1,000 per share of Series F Preferred Stock.
 
WHEREAS, on August 12, 2011, Section II.C.2 of the Agreement was amended pursuant to that certain Waiver between the parties.
 
WHEREAS, Ironridge's obligation to purchase the second two installments under the Agreement is subject to satisfaction of a closing condition in Section II.C.5.(f) of the Agreement.
 
WHEREAS, on July 28, 2011, the Company presented Ironridge with a notice to purchase $1.5 million of Series F Preferred Stock in cash.

WHEREAS, on August 15, 2011, Ironridge funded the first $500,000 installment.

WHEREAS, the condition in Section II.C.5.(f) of the Agreement was not met.

WHEREAS, in order to effect a Purchase Closing under the Agreement, the parties desire to amend the Purchase Closing terms set forth in Section 2 of the Agreement.
 
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties, intending to be legally bound, hereby agree as follows:
 
1.              Amendment .  Section II.C.2 shall be amended in its entirety and replaced with the following:
 
2.            Purchase Closings .
 
a.           Purchaser will purchase and make payment for the Preferred Shares, in cash by wire transfer of immediately available funds to an account designated by Company, as follows:
 
 
i.
130 Preferred Shares on the Trading Day (“ First Closing ”) following the later of (i) 10 Trading Days after September 7, 2011; and (ii) the Trading Day that aggregate trading volume of the Common Stock on the Trading Market after September 7, 2011, as reported by Bloomberg, equals or exceeds $500,000.00;
 
 
 

 
 
 
ii.
290 Preferred Shares on the Trading Day (“ Second Closing ”) following the earlier of (i) 10 Trading Days after the First Closing; and (ii) the Trading Day that aggregate trading volume of the Common Stock on the Trading Market after the First Closing, as reported by Bloomberg, equals or exceeds $1 Million;
 
 
iii.
290 Preferred Shares on the Trading Day (“ Third Closing ”) following the earlier of (i) 10 Trading Days after the Second Closing; and (ii) the Trading Day that aggregate trading volume of the Common Stock on the Trading Market after the Second Closing, as reported by Bloomberg, equals or exceeds $1 Million; and
 
 
iv.
290 Preferred Shares on the Trading Day (“ Fourth Closing ”) following the earlier of (i) 10 Trading Days after the Third Closing; and (ii) the Trading Day that aggregate trading volume of the Common Stock on the Trading Market after the Third Closing, as reported by Bloomberg, equals or exceeds $1 Million.
 
Company will deliver the Preferred Shares to Purchaser by reputable overnight courier immediately upon each date of receipt of funds as set forth above (each of the First, Second, Third and Fourth Closings, a “ Purchase Closing ”).  Each of the respective time periods between each Purchase Closing and the prior Purchase Closing shall be the respective “ Calculation Period ” for purposes of (b) and (c) below.
 
b.            First Closing.   Notwithstanding any other provision, the price per Preferred Share with respect to the First Closing will be equal to the lesser of:  (a) $1,000; and (b) an amount, not below zero, equal to (i) $1,000, multiplied by (ii) 85% of the average of the daily VWAPs during the period between September 7, 2011 through the First Closing minus the Floor Price (defined below), divided by (iii) $0.057.
 
c.            Company Election .   In the event that the sole condition precedent to a Purchase Closing that is not satisfied is that set forth in Section II.C.5.(f)   of the Agreement, the Company may, at its sole option, elect at any time to proceed with an alternate Purchase Closing in accordance with this section, in which case, with respect to such Purchase Closing:
 
 
i.
The condition precedent set forth in Section II.C.5.(f)   of the Agreement will not apply with respect to that Purchase Closing;
 
 
ii.
The Calculation Period will (i) commence on the Trading Day after the Purchaser receives written notice of Company’s election, and (ii) exclude any Trading Day on which the Common Stock trades below $0.20 per share (the “ Floor Price ”); and
 
 
iii.
The price per Preferred Share will be equal to the lesser of (a) $1,000, and (b) an amount equal to (i) $1,000, multiplied by (ii) 85% of the average of the VWAPs during the Calculation Period, divided by (iii) $0.257.
 
 
 

 
 
2.            Effect on Agreement; Capitalized Terms .  Except as set forth in this First Amendment, the terms and provisions of the Agreement are hereby confirmed and ratified in all respects and shall remain in full force and effect.  Capitalized terms used but not defined herein shall have the meanings set forth in the Agreement.
 
3.            Counterparts; Execution by Electronic Delivery .  This First Amendment may be executed in two or more counterparts, all of which when taken together will be considered one and the same agreement and will become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by portable document format, facsimile or electronic transmission, such signature will create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such signature page were an original thereof.
 
 
[Signatures on Following Page.]
 
 
 

 
 
This First Amendment has been signed and delivered by the undersigned as of the date set forth above.


COMPANY:

POSITIVEID CORPORATION

 
By: /s/ William J. Caragol      
Name:  William J. Caragol      
Title: Chief Executive Officer      
 
IRONRIDGE GLOBAL III, LLC

 
By: /s/ Richard H. Kreger      
Name: Richard H. Kreger      
Title: Managing Director      
 
Exhibit 31.1
 
Certification of the Chief Executive 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: November 14, 2011
/s/ William J. Caragol
 
 
William J. Caragol 
 
 
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, Bryan D. Happ, 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: November 14, 2011
/s/ Bryan D. Happ
 
 
Bryan D. Happ 
 
 
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 September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William J. Caragol, Chief Executive Officer of the Company, and I, Bryan D. Happ, 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/ William J. Caragol
   
 
William J. Caragol
   
 
Chief Executive Officer
   
 
Date: November 14, 2011
   
 
 
 
   
 
 /s/ Bryan D. Happ
   
 
Bryan D. Happ
   
 
Chief Financial Officer
   
 
Date: November 14, 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.