PositiveID
POSITIVEID Corp (Form: 10-K, Received: 03/31/2017 17:12:15)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

 

For the fiscal year ended December 31, 2016

 

or

 

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

 

For the transition period from __________ to __________

 

Commission file number: 001-33297

 

POSITIVEID CORPORATION

(Exact name of registrant as specified in its charter)

 

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

 

1690 South Congress Avenue, Suite 201

Delray Beach, Florida 33445

(Address of principal executive offices) (Zip code)

 

(561) 805-8000

(Registrant’s telephone number, including area code)

 

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

 

    None
(Title of each class)   (Name of each exchange on which registered)

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.0001 per share

 

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

 

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

 

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 [X] No [  ]

 

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

 

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

 

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

 

 Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [  ] Smaller reporting company [X]
    (Do not check if smaller reporting company)  

 

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

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant computed by reference to the price at which the common stock was last sold on the OTC Bulletin Board on June 30, 2016 was $3,759,604. For purposes of this calculation, shares of common stock held by each officer and director and by each person who owns 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes. At March 22, 2017, 6,039,899,380 shares of our common stock were outstanding.

 

 

 

 
 

 

Table of Contents

 

Item   Description   Page
         
Special Note Regarding Forward-Looking Statements   3
     
    Part I   5
         
1.   Business   5
         
1A.   Risk Factors   13
         
1B.   Unresolved Staff Comments   23
         
2.   Properties   23
         
3.   Legal Proceedings   23
         
4.   Mine Safety Disclosures   23
         
    Part II   23
         
5.   Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities   23
         
6.   Selected Financial Data   25
         
7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   25
         
7A.   Quantitative and Qualitative Disclosures About Market Risk   30
         
8.   Financial Statements and Supplementary Data   30
         
9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   30
         
9A.   Controls and Procedures   30
         
9B.   Other Information   31
         
    Part III   31
         
10.   Directors, Executive Officers and Corporate Governance   31
         
11.   Executive Compensation   34
         
12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   37
         
13.   Certain Relationships and Related Transactions, and Director Independence   39
         
14.   Principal Accountant Fees and Services   42
         
    Part IV   43
         
15.   Exhibits, Financial Statement Schedules   43
         
    Signatures   44
         
    Index to Consolidated Financial Statements   45

 

2  
 

Special Note Regarding Forward-Looking Statements

 

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

 

the expectation that operating losses will continue for the near future, and that until we are able to achieve profits, we intend to continue to seek to access the capital markets to fund the development of our products;
   
that we seek to structure our research and development on a project basis to allow management of costs and results on a discrete short term project basis, the expectation that doing so may result in quarterly expenses that rise and fall depending on the underlying project status, and the expectation that this method of managing projects may allow us to minimize our firm fixed commitments at any given point in time;
   
that we intend to continue to explore strategic opportunities, including potential acquisition opportunities of businesses that are complementary to ours;
   
that we do not anticipate declaring any cash dividends on our common stock;
   
that our ability to continue as a going concern is dependent upon our ability to obtain financing to fund the continued development of our products and working capital requirements;
   
that our current cash resources, our expected access to capital under existing financing arrangements, and, if necessary, delaying and/or reducing certain research, development and related activities and costs, that we will have sufficient funds available to meet our working capital requirements for the near-term future;
   
that our products have certain technological advantages, but maintaining these advantages will require continual investment in research and development, and later in sales and marketing;
   
that if any of our manufacturers or suppliers were to cease supplying us with system components, we would be able to procure alternative sources without material disruption to our business, and that we plan to continue to outsource any manufacturing requirements of our current and under development products;
   
that the medical application of our Firefly Dx product will require FDA clearance or CLIA waiver;
   
that Firefly Dx would enable accurate diagnostics leading to more rapid and effective treatment than what is currently available with existing systems;
   
that the combination of PositiveID’s expert bio-detection technologies with ENG’s advanced mobile labs is expected to offer customers a next generation, best of breed solution in the mobile laboratory space;
   
that M-BAND was developed in accordance with DHS guidelines;
   
that our Caregiver thermometer with TouchFree™ technology is less likely to transmit infectious disease than devices that require even minimal contact.
   
that ENG’s MobiLab™ Systems have become the primary choice of mobile labs for scientific and environmental agencies and organizations throughout the country because of their productivity in the field;
   
that ENG’s mobile cellular systems offer the latest technology for testing site performance;
   
that we will receive royalties related to our license of the iglucose ™ technology to Smart Glucose Meter Corp (“SGMC”) for up to $2 million based on potential future revenues of glucose test strips sold by SGMC.

 

3  
 

 

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

 

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

 

our ability to predict the extent of future losses or when we will become profitable;
   
our ability to continue as a going concern;
   
our ability to successfully consider, review, and if appropriate, implement other strategic opportunities;
   
our expectation that we will incur losses, on a consolidated basis, for the foreseeable future;
   
our ability to fund our operations and continued development of our products, including Firefly Dx;
   
our ability to target the bio-threat detection, real-time PCR, professional healthcare and specialty technology vehicle markets;
   
our ability to obtain and maximize the amount of capital that we will have available to pursue business opportunities;
   
our ability to obtain patents on our products, the validity, scope and enforceability of our patents, and the protection afforded by our patents;
   
the potential for costly product liability claims and claims that our products infringe the intellectual property rights of others;
   
our ability to comply with current and future regulations relating to our businesses;
   
the potential for patent infringement claims to be brought against us asserting that we are violating another party’s intellectual property rights;
   
our ability to be awarded government contracts;
   
our ability to establish and maintain proper and effective internal accounting and financial controls;
   
our ability to pay obligations when due which may result in an event of default under our financing arrangements;
   
our ability to successfully identify strategic partners or acquirers for the breath glucose detection system;
   
our ability to successfully integrate our acquisitions of Thermomedics and ENG;
   
our ability to recover or monetize the convertible notes receivable and warrants with VeriTeQ;

 

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

 

4  
 

 

PART I

 

Item 1. Business

 

The Company

 

PositiveID Corporation, including its wholly-owned subsidiaries PositiveID Diagnostics Inc. (f/k/a Microfluidic Systems) (“PDI”), E-N-G Mobile Systems, Inc. (“ENG”), and Thermomedics, Inc. (“Thermomedics”), (collectively, the “Company” or “PositiveID”), develops molecular diagnostic systems for bio-threat detection and rapid medical testing; manufactures specialty technology vehicles; and markets the Caregiver® non-contact clinical thermometer. The Company’s fully automated pathogen detection systems and assays are designed to detect a range of biological threats. The Company’s M-BAND (Microfluidic Bio-agent Autonomous Networked Detector) system is an airborne bio-threat detection system developed for the homeland defense industry to detect biological weapons of mass destruction. The Company is developing Firefly Dx, an automated pathogen detection system for rapid diagnostics, both for clinical and point-of-need applications. The Company manufactures specialty technology vehicles focused primarily on mobile laboratory and communications applications. The Company’s Caregiver® thermometer is an FDA-cleared, infrared thermometer for the professional healthcare market.

 

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

 

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

 

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

 

On May 23, 2011, we entered into a stock purchase agreement to acquire PDI, pursuant to which PDI became a wholly-owned subsidiary of the Company. Since 2012, PDI has been doing business as PositiveID. The Company specializes in the production of automated instruments for a wide range of applications in the detection and processing of biological samples, ranging from rapid medical testing to airborne pathogen detection for homeland security.

 

On October 21, 2015, we entered into an agreement to acquire all of the outstanding capital stock of Thermomedics, a Nevada corporation, pursuant to a stock purchase agreement by and between PositiveID and Sanomedics Inc., a Delaware corporation (“Sanomedics”), the shareholder of Thermomedics (collectively the “Thermomedics Acquisition”). On December 4, 2015, we entered into a first amendment to the stock purchase agreement with Sanomedics. PositiveID, Sanomedics and Thermomedics also entered into a management services and control Agreement (the “Control Agreement”), dated December 4, 2015, whereby PositiveID was appointed the manager of Thermomedics. On March 4, 2016, PositiveID, Sanomedics and Thermomedics entered into a letter agreement (the “March Agreement”), which included an amendment to the Control Agreement, an agreement to terminate intercompany indebtedness, and an agreement for the transfer of Thermomedics’ intellectual property. Under the terms of the March Agreement, PositiveID, Sanomedics and Thermomedics agreed to extend the closing date for the stock purchase agreement to March 31, 2016. As a result of the Company assuming control of Thermomedics on December 4, 2015, the Company determined, pursuant to ASC 805-10-25-6, that December 4, 2015 was the acquisition date of Thermomedics for accounting purposes and began consolidating the balance sheet and results of operations of Thermomedics as of that date. The Company completed the acquisition of the capital stock of Thermomedics on August 25, 2016.

 

On December 22, 2015, we entered into a stock purchase agreement to acquire ENG, pursuant to which ENG became a wholly-owned subsidiary. ENG manufactures specialty technology vehicles focused primarily on mobile labs, command and communications centers, and cellular applications. The acquisition of ENG closed on December 24, 2015.

 

5  
 

 

Beginning with the acquisition of PDI in 2011, the Company began to focus its operations on diagnostics and detection. Since that acquisition, the Company has either sold or exclusively licensed all of its legacy businesses, including its VeriChip assets, its iglucose™ technology, the GlucoChip technology, and its patent related to a glucose breath detection system. See “Our Business” under Part I of this Form 10-K for more information and a description of the Company’s current business.

 

Our principal executive offices are located at 1690 South Congress Avenue, Suite 201, Delray Beach, Florida 33445. Our telephone number is (561) 805-8000. Unless the context provides otherwise, when we refer to the “Company,” “we,” “our,” or “us” in this Annual Report, we are referring to PositiveID Corporation and its consolidated subsidiaries.

 

This Annual Report on Form 10-K contains trademarks and trade names of other organizations and corporations.

 

Available Information

 

We file or furnish with or to the Securities and Exchange Commission (“SEC”) our quarterly reports on Form 10-Q, annual reports on Form 10-K, current reports on Form 8-K, annual reports to stockholders and annual proxy statements and amendments to such filings. Our SEC filings are available to the public on the SEC’s website at http://www.sec.gov. These reports are also available free of charge on our website at http://www.psidcorp.com as soon as reasonably practicable after we electronically file or furnish such material with or to the SEC. The information on our website is not incorporated by reference into this Annual Report or any registration statement that incorporates this Annual Report by reference.

 

Our Business

 

We are a life sciences and technology company focused primarily on the healthcare and homeland security markets. Within our detection and diagnostics business, we specialize in the development of microfluidic systems for the automated preparation of and performance of biological assays in order to detect biological threats at high-value locations and analyze biological samples at the point of need. Thermomedics markets the Caregiver non-contact thermometer to the professional healthcare market. Our ENG subsidiary manufactures specialty technology vehicles. PositiveID has a substantial portfolio of intellectual property related primarily to sample preparation and rapid medical testing applications, and the Caregiver non-contact thermometer.

 

Since its inception, including PDI prior to its acquisition, we have received over $50 million in U.S. government grants and contracts, primarily from the Department of Homeland Security (“DHS”). We have submitted, or are in the process of submitting, bids on various potential U.S. government contracts.

 

M-BAND

 

Our M-BAND technology, developed under contract with the U.S. DHS Science & Technology directorate, is a bio-aerosol monitor with fully integrated systems for sample collection, processing and detection modules. M-BAND continuously and autonomously analyzes air samples for the detection of pathogenic bacteria, viruses, and toxins for up to 30 days. Results from individual M-BAND instruments are reported via a secure wireless network in real time to give an accurate and up-to-date status of field conditions. M-BAND performs high specificity detection for up to six organisms on the Centers for Disease Control’s category A and B select agents list. Further, we believe M-BAND was developed in accordance with DHS guidelines.

 

In December 2012, the Company entered into a Sole and Exclusive License Agreement (the “Boeing License Agreement”), a Teaming, (the “Teaming Agreement”) and a security agreement (the “Boeing Security Agreement”), with The Boeing Company (“Boeing”). The Boeing License Agreement provides Boeing the exclusive license to sell PositiveID’s M-BAND airborne bio-threat detector for the DHS BioWatch next generation opportunity, as well as other opportunities (government or commercial) that may arise in the North American market. As consideration for entry into the Boeing License Agreement, Boeing paid a license fee of $2.5 million (the “Boeing License Fee”) to the Company in three installments, which were paid in full during 2012 and 2013 and was recognized as revenue during the year ended December 31, 2015. Under the Teaming Agreement, which has now expired, and subject to certain conditions, the Company retained the exclusive rights to serve as the reagent and assay supplier of M-BAND systems to Boeing. The Company also retained all rights to sell M-BAND units, reagents and assays in international markets. Pursuant to the Boeing Security Agreement, the Company granted Boeing a security interest in all of its assets, including the licensed products and intellectual property rights (as defined in the Boeing License Agreement), to secure the Company’s performance under the Boeing License Agreement.

 

Firefly Dx

 

Our Firefly Dx system is designed to deliver molecular diagnostic results from a sample in less than 30 minutes, which, we believe, would enable accurate diagnostics leading to more rapid and effective treatment than what is currently available with existing systems. The Firefly Dx breadboard prototype system has already demonstrated the ability to detect and identify common pathogens and diseases such as E. coli, Methicillin-resistant Staphylococcus Aureus, Methicillin-susceptible Staphylococcus Aureus, Clostridium difficile, influenza and others. Firefly Dx is designed to be a simple-to-use, point-of-care, real-time polymerase chain reaction (“PCR”) device, which is designed for use by medical personnel at the point-of-need; first response teams to detect biological agents associated with weapons of mass destruction; agricultural screening in domestic sectors and developing countries; and point-of-need monitoring of pathogenic outbreaks.

 

6  
 

 

We have demonstrated in our labs that the entire Firefly Dx prototype design functions as intended through the complete sample purification and detection process without the use of any third-party hardware. The next step in the development of Firefly Dx is to combine these processes and breadboards into single units and demonstrate the capability to run a test from putting the raw sample in the cartridge through sample preparation, PCR and real-time detection as a single system. We are currently seeking a government contract or other partner to help us fund the remaining development and the build of the smaller, field-able prototype for testing by third parties to prepare for commercialization.

 

Caregiver

 

Caregiver is an infrared thermometer, FDA-cleared for clinical use, that measures forehead temperature in adults, children and infants, without contact. It delivers an oral-equivalent temperature directly from the forehead in one to two seconds. Caregiver is the world’s first clinically validated, non-contact thermometer for the healthcare providers market, which includes hospitals, physicians’ offices, medical clinics, nursing homes and other long-term care institutions, and acute care hospitals. Caregiver requires minimal training and is proven as accurate as other methods of clinical thermometry, which include predictive oral/rectal/axillary electronic, infrared tympanic, temporal artery contact scanner, etc. Other temperature monitoring devices may require intensive technique concentration, which make them prone to mistaken placement or dwell time, and may require replacement metal probes, cords, or other parts. The Caregiver thermometer with TouchFree™ technology is less likely to transmit infectious disease than devices that require even minimal contact. Caregiver saves medical facilities the cost of probe covers ($0.05 to $0.10 per temperature reading), storage space and disposal costs. It is estimated that Caregiver can offer savings of $250 or more per year per device in probe cover supplies alone.

 

ENG Mobile Systems

 

Our ENG subsidiary is a leader in the specialty technology vehicle market, with a focus on mobile laboratories, command and communications applications, and mobile cellular systems. The fastest growing segment of ENG’s business over the last decade are its mobile labs, which include government and corporate laboratories for environmental, chemical, biological, nuclear, radiological and explosives testing in the field. ENG’s MobiLab™ Systems have become the primary choice of mobile labs for scientific and environmental agencies and organizations throughout the country because of their productivity in the field. ENG has delivered more than 400 MobiLabs to customers around the world. The combination of PositiveID’s expert bio-detection technologies with ENG’s advanced mobile labs is expected to offer customers a next generation, best of breed solution in the mobile laboratory space.

 

ENG also provides specialty vehicle manufacturing for TV news vans and trucks, emergency response trailers, mobile command centers, infrared inspection, and other special purpose vehicles. ENG provides technical support to customers’ field personnel through its training and educational programs, and also offers customizable service and maintenance agreements. ENG’s mobile cellular systems offer temporary cell sites to boost capacity, as well as the latest technology for testing site performance. During the past 25 years, ENG has pioneered numerous engineering and design breakthroughs.

 

Legacy Products

 

Between 2011 and 2013, we entered into license or sale agreements to dispose of certain technologies concentrated in the area of diabetes management and patient identification. Those products and their status are as follows:

 

VeriChip and GlucoChip

 

Throughout the course of 2012 through 2014, the Company and VeriTeQ, a business run by a former related party (CEO of the Company through 2011), entered into a number of agreements for the intellectual property related to the Company’s embedded biosensor portfolio, which ultimately resulted in a GlucoChip and Settlement Agreement, entered into on October 20, 2014 (the “GlucoChip Agreement”), under which the final element of the Company’s implantable microchip business was transferred to VeriTeQ.

 

Pursuant to the VeriTeQ agreements, the Company holds a Note that was received as payment for shared services payments that the Company made on behalf of VeriTeQ during 2011 and 2012 which Note had an original value of $222,115. The note has been fully reserved in all periods presented. The Company also holds a five-year warrant dated November 13, 2013, with original terms entitling the Company to purchase 300,000 shares of VeriTeQ common stock at a price of $2.84. Pursuant to the terms of the warrant, in particular the full quantity and pricing reset provisions, the warrant had an original dollar value of $852,000 and can be exercised using a cashless exercise feature.

 

On October 20, 2014, the Company entered into the GlucoChip Agreement with VeriTeQ to transfer the intellectual property related to its GlucoChip development and to provide financial support to VeriTeQ, for a period of up to two years, in the form of convertible promissory notes. VeriTeQ issued the Company Convertible Promissory Notes in total principal amount of $200,000, and agreed to provide VeriTeQ with continuing financial support through the issuance of additional convertible promissory notes up to an additional amount of $205,000. As of December 31, 2016, the Company had issued Notes with a principal value of $200,000 under the GlucoChip Agreement. As VeriTeQ is in default of its agreements with the Company, there is no intention to provide any additional notes until such time as all defaults are cured.

 

On October 19, 2015, VeriTeQ received a default notice from its senior lender and a Notice of Disposition of Collateral advising the Company that the senior lender, acting as collateral agent, intended to sell the assets at auction, which it did on November 4, 2015. On November 25, 2015, VeriTeQ entered into a stock purchase agreement with an unaffiliated company whereby VeriTeQ agreed to acquire all of the issued and outstanding membership interests of that company, and on May 6, 2016, VeriTeQ completed the closing of that agreement.

 

Pursuant to the cashless exercise feature of the VeriTeQ warrant and subsequent sale of the underlying shares, the Company realized $335,600 of income which was recorded under other income in the consolidated Statement of Operations during the year ended December 31, 2015. As VeriTeQ is an early stage company, not yet fully capitalized, the Company plans to continue to fully reserve all note receivable and warrant balances. If and when proceeds are realized in the future, gains will be recognized. As of December 31, 2016, the Company had outstanding convertible notes receivable from VeriTeQ of $422,115 and is also owed default principal and interest of which a full reserve has been established as noted above.

 

7  
 

 

Sales, Marketing and Distribution

 

Our sales, marketing and distribution plan for our healthcare products is to align with large medical distribution companies, and either manufacture the products to their specification or license the products and underlying technology to them. We have entered into various distribution agreements with several medical equipment suppliers to distribute our Caregiver thermometer. We will also sell the Caregiver thermometer under separate agreements with commissioned independent sales representatives and smaller distributors who have non-exclusive territorial agreements. ENG markets directly to customers through its internal sales force, website, referrals and channel partners.

 

We are subject to certain indemnification obligations in connection with our distribution agreements. We are usually required to procure and maintain product liability insurance of specified limits per occurrence and in the aggregate, naming the contracting party as an additional insured. Our distributors, resellers, and sales representatives typically agree not to sell competitive products during the term of their agreements with us.

 

Manufacturing: Distributor and Supplier Arrangements

 

We have historically outsourced the manufacturing of all the hardware components of our systems to third parties. As of December 31, 2016, we have not had material difficulties obtaining system components. We believe that if any of our manufacturers or suppliers were to cease supplying us with system components, we would be able to procure alternative sources without material disruption to our business. We plan to continue to outsource any manufacturing requirements of our current and under-development products.

 

The technology and functionality of the Caregiver thermometer was co-designed by our new supplier in Taiwan, which, as discussed below, is the manufacturer and the assignor to us of the requisite U.S. governmental pre-marketing approvals. We designed the housing of our products, incorporating our extensive thermometry engineering and clinical expertise. We are in the process of designing and developing, with our supplier, all aspects, including technology, of our proposed second-generation products.

 

Under certain agreements, the Company may be subject to penalties if they are unable to supply products under its obligations. Since inception, the Company has never incurred any such penalties.

 

Environmental Regulation

 

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

 

8  
 

 

Government Regulation

 

Regulation by the FDA

 

The thermometers that we market are subject to regulation by numerous regulatory bodies, including the FDA and comparable international regulatory agencies. These agencies require manufacturers of medical devices, such as our manufacturer, to comply with applicable laws and regulations governing the development, testing, manufacturing, labeling, marketing and distribution of medical devices. In addition, the Quality Management System employed by our contract manufacturer must meet the FDA 21 CFR Part 820, and its manufacturing facility is subject to periodic FDA audit. Devices are generally subject to varying levels of regulatory control, the most comprehensive of which requires that a clinical evaluation be conducted before a device receives approval for commercial distribution. Our products are subject to the lowest level of regulation and only require pre-marketing approval, as described below.

 

In the United States, permission to distribute a new device generally can be met in one of three ways. The process relevant to our products requires that a pre-market notification (“510(k) Submission”) be made to the FDA to demonstrate that the device is as safe and effective as, or substantially equivalent to, a legally marketed device that is not subject to pre-market approval (“PMA”), i.e., the “predicate” device. An appropriate predicate device for a pre-market notification is one that (i) was legally marketed prior to May 28, 1976, (ii) was approved under a PMA but then subsequently reclassified from class III to class II or I, or (iii) has been found to be substantially equivalent and cleared for commercial distribution under a 510(k) Submission. Applicants must submit descriptive data and, when necessary, performance data to establish that the device is substantially equivalent to a predicate device. (In some instances not relevant to our products, data from human clinical trials must also be submitted in support of a 510(k) Submission. The FDA must issue an order finding substantial equivalence before commercial distribution can occur. Changes to existing devices covered by a 510(k) Submission that do not raise new questions of safety or effectiveness can generally be made without additional 510(k) Submissions. More significant changes, such as new designs or materials, may require a separate 510(k) with data to support that the modified device remains substantially equivalent. The FDA has recently begun to review its clearance process in an effort to make it more rigorous, which may require additional clinical data, time and effort for product clearance.

 

We have received a 510(k) pre-market approval from the FDA for our thermometers. This 510(k) will allow us to sell our second- generation thermometers without additional approvals. However, we may need to obtain recertification. Depending on product changes, this recertification may require a complete documentation package, an abbreviated documentation package or an internal documentation package, a determination to be made by guidance documents from the FDA, in concert with our regulatory consultants.

 

Some countries do not have medical device regulations, but in most foreign countries, medical devices are regulated. Frequently, regulatory approval may first be obtained in a foreign country prior to application in the United States to take advantage of differing regulatory requirements. If we market in foreign countries, such as the European countries, ISO 13485 is the internationally recognized standard for medical devices. Products must comply with ISO 13485 to receive the “CE” mark. We design our products to comply with the requirements of both the FDA and ISO 13485. We intend to conduct audits of our contract manufacturers to ensure compliance with these regulations. If an audit uncovers problems, there is a risk of disruption in product availability.

 

Upon the completion of development, we intend to apply for a Clinical Laboratory Improvement Amendments (“CLIA”) waiver from the FDA to market Firefly Dx.

 

CLIA Waiver. Congress passed the CLIA in 1988 establishing quality standards for all laboratory testing to ensure the accuracy, reliability and timeliness of patient test results regardless of where the test was performed. The requirements are based on the complexity of the test and not the type of laboratory where the testing is performed. As defined by CLIA, waived tests are categorized as “simple laboratory examinations and procedures that have an insignificant risk of an erroneous result.” The FDA determines the criteria for tests being simple with a low risk of error and approves manufacturer’s applications for test system waiver.

 

FDA Premarket Clearance and Approval Requirements . Generally speaking, unless an exemption applies such as applying for a CLIA waiver, each medical device we wish to distribute commercially in the United States will require either prior clearance under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, (“FFDCA”), or a PMA, approved by the FDA. Medical devices are classified into one of three classes — Class I, Class II or Class III — depending on the degree of risk to the patient associated with the medical device and the extent of control needed to ensure its safety and effectiveness. Devices deemed to pose low or moderate risks are placed in either Class I or II, respectively. The manufacturer of a Class II device is required to submit to the FDA a premarket notification requesting permission to commercially distribute the device and demonstrating that the proposed device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of a PMA. This process is known as 510(k) clearance. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device, are considered high risk and placed in Class III, requiring premarket approval.

 

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

 

quality system regulations, (“QSR”), which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;
   
labeling regulations and FDA prohibitions against the promotion of regulated products for uncleared, unapproved or off-label uses;
   
clearance or approval of product modifications that could significantly affect safety or effectiveness or that would constitute a major change in intended use;
   
medical device reporting, (“MDR”), regulations, which require that a manufacturer report to the FDA if the manufacturer’s device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur;
   
post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device; and
   
medical device tracking requirements apply when the failure of the device would be reasonably likely to have serious adverse health consequences.

 

Fraud and Abuse

 

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

 

Anti-Kickback Laws

 

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

 

Federal False Claims Act

 

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

 

State Laws and Regulations

 

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

 

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Laws and Regulations Governing Privacy and Security

 

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

 

U.S. Federal Trade Commission Oversight

 

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

 

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

 

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

 

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

 

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

 

State Legislation

 

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

 

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

 

Regulation of Government Bid Process and Contracting

 

Contracts with federal governmental agencies are obtained by primarily through a competitive proposal/bidding process. Although practices vary, typically a formal Request for Proposal is issued by the governmental agency, stating the scope of work to be performed, length of contract, performance bonding requirements, minimum qualifications of bidders, selection criteria and the format to be followed in the bid or proposal. Usually, a committee appointed by the governmental agency reviews proposals and makes an award determination. The committee may award the contract to a particular bidder or decide not to award the contract. The committees consider a number of factors, including the technical quality of the proposal, the offered price and the reputation of the bidder for providing quality care. The award of a contract may be subject to formal or informal protest by unsuccessful bidders through a governmental appeals process. Our contracts with governmental agencies often require us to comply with numerous additional requirements regarding recordkeeping and accounting, non-discrimination in the hiring of personnel, safety, safeguarding confidential information, management qualifications, professional licensing requirements and other matters. If a violation of the terms of an applicable contractual provision occurs, a contractor may be disbarred or suspended from obtaining future contracts for specified periods of time. We have never been disbarred or suspended from seeking procurements by any governmental agency.

 

Health Care Reform

 

The Patient Protection and Affordable Care Act (“Affordable Care Act”), will likely have a dramatic effect on health care financing and insurance coverage for Americans. A portion of the Affordable Care Act, referred to as the “Physician Sunshine Payment” provisions, requires applicable manufacturers and distributors of drugs, devices, biological, or medical supplies covered under Medicare, Medicaid or the Children’s Health Insurance Program to report annually to the Department of Health and Human Services certain payments or other transfers of value to physicians and teaching hospitals. They also require applicable manufacturers and applicable group purchasing organizations to report certain information regarding the ownership or investment interests held by physicians or the immediate family members of physicians in such entities. Final regulations implementing the Physician Sunshine Payment provisions were issued on February 8, 2013 and became effective on April 9, 2013. The required data was required to be reported to the Centers for Medicare and Medicaid Services by March 31, 2014. Civil monetary penalties apply for failure to report payments, transfers of value, or physician ownership interests. The Company had no issues with the implemented Affordable Care Act.

 

Risk Management

 

The testing, marketing and sale of human healthcare products entails an inherent risk of product liability claims. In the normal course of business, product liability claims may be asserted against us in the future related to events unknown at the present time. We have obtained and maintain insurance with respect to product liability claims in amounts we believe are appropriate. However, product liability claims, product recalls, litigation in the future, regardless of outcome, could have a material adverse effect on our business. We believe that our risk management practices are reasonably adequate to protect against reasonable product liability losses. However, unanticipated catastrophic losses could have a material adverse impact on our financial position, results of operations and liquidity.

 

Competitive Conditions

 

We compete with many companies in the molecular diagnostics industry and the homeland defense and clinical markets. We believe that Luminex Corporation, Cepheid, Roche, BioMerieux, and Thermo Fisher Scientific will be competitors for our molecular diagnostics products. We believe Welch Allyn, Braun and Exergen, which markets a line of oral, infrared, tympanic and axillary thermometers, is our main competitor in the clinical-use thermometry market. In our ENG business, we believe our competitors include GermFree Laboratories, Inc., LDV Inc., and Farber Specialty Vehicles.

 

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

 

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Research and Development

 

The principal objectives of our research and development program are to develop high-value molecular diagnostic products such as Firefly Dx and M-BAND, as well as to improve the accuracy of our thermometer products so that we can complete development of and introduce our next-generation line of human thermometers to healthcare professionals and institutions. We focus our efforts on five main areas: 1) engineering efforts to extend the capabilities of our systems and to develop new systems; 2) assay development efforts to design, optimize and produce specific tests that leverage the systems and chemistry we have developed; 3) target discovery research to identify novel micro RNA targets to be used in the development of future assays; 4) chemistry research to develop innovative and proprietary methods to design and synthesize oligonucleotide primers, probes and dyes to optimize the speed, performance and ease-of-use of our assays; and 5) developing hardware and software for all our new thermometer models, and further clinical studies for validation.

 

Employees

 

As of March 22, 2017, we had 29 full-time employees, of which 3 were in management; 5 were in finance and administration; 5 in sales, marketing and business development; 6 in research, development and engineering; and 10 in manufacturing. We consider our relationship with our employees to be satisfactory and have not experienced any interruptions of our operations as a result of labor disagreements. None of our employees are represented by labor unions or covered by collective bargaining agreements.

 

Item 1A. Risk Factors

 

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

 

Risks Related to the Operations and Business of PositiveID

 

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

 

For the years ended December 31, 2016 and 2015, we experienced net losses of $13.1 million and $11.4 million, respectively and our accumulated deficit at December 31, 2016 was $157.2 million. Until our ENG, Caregiver, Firefly and M-BAND businesses and products are profitable on a combined basis, we do not anticipate generating significant operating profits. We have submitted, or are in the process of submitting, bids on various potential new U.S. Government contracts; however, there can be no assurance that we will be successful in obtaining any such new or other contracts.

 

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

 

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

 

Our annual audited financial statements for the years ended December 31, 2016 and 2015 indicate conditions exist that raise substantial doubt as to whether we will continue as a going concern. Our continuation as a going concern is dependent upon our ability to obtain financing to fund the continued development of products, and working capital requirements. If we cannot continue as a going concern, our stockholders may lose their entire investment.

 

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

 

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

 

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

 

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

 

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

 

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

 

Our operations are subject to varying degrees of regulation by the FDA, other federal, state and local regulatory agencies and legislative bodies. Adverse decisions or new or amended regulations or mandates adopted by any of these regulatory or legislative bodies could negatively impact our operations by, among other things, causing unexpected or changed capital investments, lost revenues, increased costs of doing business, and could limit our ability to engage in certain sales or marketing activities.

 

We depend on key personnel to manage our business effectively, and, if we are unable to hire, retain or motivate qualified personnel, our ability to design, develop, market and sell our systems could be harmed.

 

Our future success depends, in part, on certain key employees, including William J. Caragol, our Chairman of the Board of Directors (the “Board”) and Chief Executive Officer and Lyle Probst, our President, and on our ability to attract and retain highly skilled personnel. The loss of the services of any of our key personnel may seriously harm our business, financial condition and results of operations. In addition, the inability to attract or retain qualified personnel, or delays in hiring required personnel, particularly operations, finance, accounting, sales and marketing personnel, may also seriously harm our business, financial condition and results of operations. Our ability to attract and retain highly skilled personnel will be a critical factor in determining whether we will be successful in the future.

 

We may be unable to make or successfully integrate acquisitions.

 

Our business and growth strategies depend in large part on our ability to identify and acquire suitable companies. Delays or failures in acquiring new companies would materially and adversely affect our planned growth.

 

Strategic acquisitions, investments and alliances are intended to expand our ability to offer, high quality detection and diagnostic products and services. If we are unsuccessful in our acquisitions, investments and alliances, we may be unable to grow our business significantly or may record asset impairment charges in the future. The success of any acquisition, investment or alliance that we may undertake in the future will depend on a number of factors, including:

 

our ability to identify suitable opportunities for acquisition, investment or alliance, if at all;
   
our ability to finance any future acquisition, investment or alliance on terms acceptable to us, if at all;
   
whether we are able to establish an acquisition, investment or alliance on terms that are satisfactory to us, if at all;
   
the strength of the other company’s underlying technology and ability to execute;
   
intellectual property and pending litigation related to these technologies;
   
regulatory approvals and reimbursement levels, if any, of the acquired products, if any; and
   
our ability to successfully integrate acquired companies and businesses with our existing business, including the ability to adequately fund acquired in-process research and development projects.

 

Any potential future acquisitions we consummate will be dilutive, possibly substantially, to the equity ownership interests of our shareholders since we intend to pay for such acquisitions by issuing shares of our common stock, and also may be dilutive to our earnings per share, if any.

 

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Our acquisition strategy may not have the desired result, and notwithstanding effecting numerous acquisitions, we still may be unable to achieve profitability or, if profitability should be achieved, to sustain it.

 

We will continue to incur the expenses of complying with public company reporting requirements.

 

We have an obligation to continue to comply with the applicable reporting requirements of the Exchange Act, which includes the filing with the SEC of periodic reports, proxy statements and other documents relating to our business, financial conditions and other matters, even though compliance with such reporting requirements is economically burdensome at this time.

 

Directors, executive officers, principal stockholders and affiliated entities own a significant percentage of our capital stock, and they may make decisions that you do not consider to be in the best interests of our stockholders.

 

As of March 22, 2017, our current named directors and executive officers beneficially owned, in the aggregate, approximately 85.9% of our outstanding voting securities, including 46.6% owned by our Chairman of the Board and Chief Executive Officer. As a result, if some, or all of them acted together, they would have the ability to exert substantial influence over the election of the Board and the outcome of issues requiring approval by our stockholders. This concentration of ownership may also have the effect of delaying or preventing a change in control of the Company that may be favored by other stockholders. This could prevent transactions in which stockholders might otherwise recover a premium for their shares over current market prices.

 

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

 

From September 30, 2013 through April 6, 2016, the Company issued 2,025 shares of Series I Preferred Stock to its officers, directors and management as management and director compensation and payment of deferred obligations. Each of the Series I preferred is convertible into the Company’s Common Stock, at stated value plus accrued dividends, at the closing bid price on the issuance date, any time at the option of the holder and by the Company in the event that the Company’s closing stock price exceeds 400% of the conversion price for twenty consecutive trading days. The Series I Preferred Stock had voting rights equivalent to twenty-five votes per common share equivalent.

 

On July 25, 2016, the Board authorized a Certificate of Designations of Preferences, Rights and Limitations of Series II Convertible Preferred Stock (the “Certificate”). The Certificate was filed with the State of Delaware Secretary of State on July 25, 2016. The Series II Preferred ranks: (a) senior with respect to dividends and right of liquidation with the common stock; (b) pari passu with respect to dividends and right of liquidation with the Company’s Series I Preferred and Series J Convertible Preferred Stock; and (c) junior to all existing and future indebtedness of the Company. The Series II Preferred has a stated value per share of $1,000, subject to adjustment as provided in the Certificate (the “Stated Value”), and a dividend rate of 6% per annum of the Stated Value. As with the Series I Preferred, the Series II Preferred has 25 votes per common share equivalent. The Series II Preferred is subject to redemption (at Stated Value, plus any accrued, but unpaid dividends (the “Liquidation Value”)) by the Company no later than three years after a Deemed Liquidation Event (as defined in the Certificate) and at the Company’s option after one year from the issuance date of the Series II Preferred, subject to a ten-day notice (to allow holder conversion). The Series II Preferred is convertible at the option of a holder or if the closing price of the common stock exceeds 400% of the Conversion Price for a period of twenty consecutive trading days, at the option of the Company. Conversion Price means a price per share of the common stock equal to 100% of the lowest daily volume weighted average price of the common stock during the subsequent 12 months following the date the Series II Preferred was issued.

 

On August 11, 2016, the Board of PositiveID agreed to exchange 2,025 shares of its Series I Preferred, which have a stated value of $2,025,000 and redemption value of $2,261,800 for 2,262 shares of Series II Preferred, which have a stated value of $2,262,000, held by its directors, officers and management, namely, our CEO, acting CFO and Chairman, William J. Caragol, our President, Lyle L. Probst, and our three non-employee directors, Jeffrey Cobb, Michael Krawitz, and Ned L. Siegel, as well as Allison Tomek, our Senior Vice President of Corporate Development, and Kimothy Smith, our Chief Technology Advisor (the “Exchange”). The Series II have an aggregate stated value equivalent to the redemption value of the Series I at the exchange date. Pursuant to the Exchange, each existing holder of Series I Preferred exchanged their Series I Preferred shares for Series II Preferred shares having equivalent per share stated value, maintaining the same voting rights as they had as holders of the Series I Preferred. Both the Series I Preferred and the Series II Preferred have a stated value per share of $1,000, and a dividend rate of 6% per annum. All shares of Series I Preferred previously issued have become null and void and any and all rights arising thereunder have been extinguished. The Series II Preferred is only forfeitable after the exchange date up to January 1, 2019 upon termination for cause and is subject to acceleration in the event of conversion, redemption and certain events. The total Series I Preferred shares exchanged for Series II Preferred shares on August 11, 2016 is detailed as follows:

 

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        Preferred Series I     Preferred Series II  

Name

 

Position

 

Shares Issued

    Common Shares Issuable Upon Conversion    

Total Votes

   

Shares Issued

    Common Shares Issuable Upon Conversion    

Total Votes

 
William J. Caragol   Chairman and Chief Executive Officer     956       10,884,308       272,107,685       1,077       10,884,308       272,107,685  
Michael E. Krawitz   Director     151       1,712,993       42,824,823       169       1,712,993       42,824,823  
Jeffrey S. Cobb   Director     138       1,558,948       38,973,711       154       1,558,948       38,973,711  
Ned L. Siegel   Director     114       1,274,550       31,863,751       126       1,274,550       31,863,751  
Lyle Probst   President     415       4,614,955       115,373,862       456       4,614,955       115,373,862  
Allison F. Tomek   SVP of Corporate Development     151       1,677,563       41,939,080       166       1,677,563       41,939,080  
Kimothy Smith   Chief Technology Advisor     50       553,761       13,844,034       55       553,761       13,844,034  
Caragol Family Irrevocable Trust         50       592,487       14,812,184       59       592,487       14,812,184  
Total         2,025       22,869,565       571,739,130       2,262       22,869,565       571,739,130  

 

As a result of the exchange, there were nil and 2,262 shares of Series I and Series II Preferred shares, respectively, issued and outstanding as of December 31, 2016.

 

As of March 22, 2017, our officers, directors and management (in addition to the five people who make up the Majority Stockholders, this includes Allison Tomek, our Senior Vice President of Corporate Development, and Kimothy Smith, our Chief Technology Advisor) have an aggregate of 292,670,729,287 votes on any matter brought to a vote of the holders of our common stock, including an aggregate of 293,089,001,370 votes, or 98% of the total vote, through the ownership of Series II Preferred Stock, and 99,467 votes through the ownership of shares of our common stock. As a result, our named officers, directors, and management have voting control over the 299,128,900,750 of the outstanding voting shares of the Company.

 

Our Board may, at any time, authorize the issuance of additional common or preferred stock without common stockholder approval, subject only to the total number of authorized common and preferred shares set forth in our certificate of incorporation. The terms of equity securities issued by us in future transactions may be more favorable to new investors, and may include dividend and/or liquidation preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect. Since management has voting control over the Company, it also has the ability to approve any increase in the amount of authorized shares of common or preferred stock thus, there are no limitations on management’s ability to continue to make dilutive issuances of securities.

 

Risks Related to Our Product Development Efforts

 

We anticipate future losses and will require additional financing, and our failure to obtain additional financing when needed could force us to delay, reduce or eliminate our product development programs or commercialization efforts.

 

We anticipate future losses and therefore may be dependent on additional financing to execute our business plan. In particular, we will require additional capital to continue to conduct the research and development and obtain regulatory clearances and approvals necessary to bring our products to market and to establish effective marketing and sales capabilities for existing and future products. Our operating plan may change, and we may need additional funds sooner than anticipated to meet our operational needs and capital requirements for product development, clinical trials and commercialization. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available on a timely basis, we may terminate or delay the development of one or more of our products, or delay establishment of sales and marketing capabilities or other activities necessary to commercialize our products.

 

Our future capital requirements will depend on many factors, including: the research and development of our molecular diagnostic products, the costs of expanding sales and marketing infrastructure and manufacturing operations; the number and types of future products we develop and commercialize; the costs, timing and outcomes of regulatory reviews associated with our current and future product candidates; the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims; and the extent and scope of our general and administrative expenses.

 

16  
 

 

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

 

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

 

Industry and Business Risks Related to E-N-G Mobile Systems, Inc.

 

We expect a number of factors to cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance.

 

Our revenues and operating results could vary significantly from quarter to quarter and year-to-year because of a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. In addition to other risk factors discussed in this section, factors that may contribute to the variability of our quarterly and annual results include:

 

our ability to accurately forecast revenues and appropriately plan our expenses;
   
the impact of worldwide economic conditions, including the resulting effect on consumer spending;
   
our ability to maintain an adequate rate of growth;
   
our ability to effectively manage our growth;
   
our ability to attract new customers;
   
our ability to successfully enter new markets and manage our expansion;
   
the effects of increased competition in our business;
   
our ability to keep pace with changes in technology and our competitors;
   
our ability to successfully manage any future acquisitions of businesses, solutions or technologies;
   
the success of our marketing efforts;
   
interruptions in service and any related impact on our reputation;
   
the attraction and retention of qualified employees and key personnel;
   
our ability to protect our intellectual property;
   
costs associated with defending intellectual property infringement and other claims;
   
the effects of natural or man-made catastrophic events;
   
the effectiveness of our internal controls; and
   
changes in government regulation affecting our business.

 

As a result of these and other factors, the results of any prior quarterly or annual periods should not be relied upon as indications of our future operating performance, and any unfavorable changes in these or other factors could have a material adverse effect on our business, financial condition and results of operation.

 

17  
 

 

We may face strong competition from larger, established companies.

 

We likely will face intense competition from other companies that provide the same or similar custom specialty vehicle manufacturing and other services that compete with acquired businesses, virtually all of which can be expected to have longer operating histories, greater name recognition, larger installed customer bases and significantly more financial resources, R&D facilities and manufacturing and marketing experience than we have. There can be no assurance that developments by our potential competitors will not render our existing and future products or services obsolete. In addition, we expect to face competition from new entrants into the custom specialty vehicle business. As the demand for products and services grows and new markets are exploited, we expect that competition will become more intense, as current and future competitors begin to offer an increasing number of diversified products and services. We may not have sufficient resources to maintain our research and development, marketing, sales and customer support efforts on a competitive basis. Additionally, we may not be able to make the technological advances necessary to maintain a competitive advantage with respect to our products and services. Increased competition could result in price reductions, fewer product orders, obsolete technology and reduced operating margins, any of which could materially and adversely affect our business, financial condition and results of operations.

 

Growth may place significant demands on our management and our infrastructure.

 

We plan for substantial growth in our business, and this growth would place significant demands on our management and our operational and financial infrastructure. If our operations grow in size, scope and complexity, we will need to improve and upgrade our systems and infrastructure to meet customer demand. The expansion of our systems and infrastructure will require us to commit substantial financial, operational and technical resources in advance of an increase in the volume of business, with no assurance that the volume of business will increase. Continued growth could also strain our ability to maintain reliable service levels for our customers and meet their expected delivery schedules, develop and improve our operational, financial and management controls, enhance our reporting systems and procedures and recruit, train and retain highly skilled personnel.

 

Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, operating results and financial condition would be harmed.

 

Industry and Business Risks Related to Thermomedics, Inc.

 

Cost and quality issues might arise from our dependence on a third-party, sole source manufacturer.

 

We currently buy our products from one third-party, sole source supplier who produces our products in its plant in Taiwan. Although we have the right to engage other manufacturers, we have not done so. Accordingly, our reliance on this supplier involves certain risks, including:

 

The cost of our products might increase, for reasons such as inflation and increases in the price of the precious metals, if any, or other internal parts used to make them, which could cause our cost of goods to increase and reduce our gross margin and profitability if any; and
   
Poor quality could adversely affect the reliability and reputation of our products.

 

Any of these uncertainties also could adversely affect our business reputation and otherwise impair our profitability and ability to compete.

 

We may not be able to compete effectively.

 

Our competition includes Welch Allyn, Braun and Exergen, all of which market a line or lines of thermometers. Each competitor has national distribution and a longer operating history than we do; and these brands have greater brand name recognition and significantly greater financial, technical sales, marketing, distribution and research and development resources. We may be unable to compete successfully against this competition.

 

Our research and development may be unsuccessful; our next generation products may not be developed, or if developed may fail to win commercial acceptance.

 

Our business is characterized by extensive research and development, and rapid technological change. Developments by other companies of new or improved products or technologies, especially of thermometers for use by consumers on pet dogs may make our products or proposed products obsolete or less competitive and may negatively impact our net sales. We should, subject to having adequate financial resources (which we currently do not possess), devote continued efforts and financial resources to develop or acquire scientifically advanced technologies, apply our technologies cost-effectively across our product lines and markets and, attract and retain skilled electrical engineering and other development personnel. If we fail to develop new products or enhance existing products, it would have a material adverse effect on our business, financial condition and results of operations.

 

18  
 

 

In order to develop new products and improve current product offerings, we are focusing our research and development programs largely on the development of next-generation models intended for the professional health care markets, principally with greater accuracy than our current models. If we are unable to develop, launch these products as anticipated, and have them accepted commercially, our ability to expand our market position may be materially adversely impacted. Further, we are investigating opportunities to further expand our presence in, and diversify into, medical treatment technologies and other medical devices. Expanding our focus beyond our current business would be expensive and time-consuming. There can be no assurance that we will be able to do so on terms favorable to us, or that these opportunities will achieve commercial feasibility, obtain regulatory approval or gain market acceptance. A delay in the development or approval of these technologies or our decision to reduce our investments my adversely impact the contribution of these technologies to our future growth.

 

Product shortages may arise if our contract manufacturer fails to comply with government regulations.

 

Medical device manufacturers are required to register with the FDA and are subject to periodic inspection by the FDA for compliance with its Qualify System Regulation requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures. In addition, the Federal Medical Device Reporting regulations require a manufacturer to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. Compliance with applicable regulatory requirements is subject to continual review and is monitored rigorously through period inspections by the FDA. Our manufacturer and supplier is International Standards Organization (“ISO”) certified, but if it were to fail to adhere to quality system regulations or ISO requirements, this could delay production of our products and lead to fines, difficulties in obtaining regulatory clearances, recalls, enforcement actions, including injunctive relief or consent decrees, or other consequences, which could, in turn, have a material adverse effect on our financial condition and results of operations.

 

Our medical devices may not meet government regulations.

 

Our products and development activities are subject to regulation by the FDA pursuant to the Federal Food, Drug and Cosmetic Act (“FDC Act”), and, if we should sell our products abroad, by comparable agencies in foreign countries, and by other regulatory agencies and governing bodies. Under the FDC Act, medical devices must receive FDA clearance or approval before they can be commercially marketed in the U.S. The FDA is reviewing its clearance process in an effort to make it more rigorous, which may require additional clinical data, if any, time and effort for product clearance. In addition, most major markets for medical devices outside the U.S. require clearance, approval or compliance with certain standards before a product can be commercially marketed. The process of obtaining marketing approval or clearance from the FDA for new products, or with respect to enhancements or modifications to existing products, could:

 

Take a significant period of time;
   
Require the expenditure of substantial resources;
   
Involve rigorous pre-clinical and clinical testing, as well as increased post-market surveillance;
   
Require changes to products; and
   
Result in limitations on the indicated uses of products.

 

Countries around the world have adopted more stringent regulatory requirements that have added or are expected to add to the delays and uncertainties associated with new product releases, as well as the clinical, if any, and regulatory costs of supporting those releases. Even after products have received marketing approval or clearance, product approvals and clearances by the FDA can be withdrawn due to failure to comply with regulatory standards or the occurrence unforeseen problems following initial approval. There can be no assurance that we will receive the required clearances for new products or modifications to existing products on a timely basis or that any approval will not be subsequently withdrawn or conditioned upon extensive post-market study requirements.

 

In addition, regulations regarding the development, manufacture and sale of medical devices are subject to future change. We cannot predict what impact, if any, those changes might have on our business. Failure to comply with regulatory requirements could have a material adverse effect on our business, financial condition and results of operations. Later discovery of previously unknown problems with a product could result in fines, delays or suspensions of regulatory clearances, seizures or recalls of products, physician advisories or other field actions, operating restrictions and/or criminal prosecution. We also may initiate field actions as a result of our manufacturer’s failure to strictly comply with our internal quality policies. The failure to receive product approval clearance on a timely basis, suspensions of regulatory clearances, seizures or recalls of products, physician advisories or other field actions, or the withdrawal of product approval by the FDA, could have a material adverse effect on our business, financial condition and results of operations.

 

19  
 

 

We may not be able to protect our intellectual property.

 

The medical device market in which we primarily participate is largely technology driven. Consumers historical move quickly to new products and new technologies. As a result, intellectual property rights, particularly patents and trade secrets, play a significant role in product development and differentiation. However, intellectual property litigation is inherently complex and unpredictable. Furthermore, appellate courts can overturn lower court patent decisions.

 

We face intellectual property risks that may negatively affect our brand names, reputation, revenues, and potential profitability.

 

In our second-generation products we will be depending upon a variety of methods and techniques that we regard as proprietary trade secrets. We are also dependent upon a variety of trademarks and designs to promote brand name development and recognition, and we rely on a combination of trade secrets, patents, trademarks, and unfair competition and other intellectual property laws to protect our rights to such intellectual property. However, to the extent that our products violate the proprietary right of others we may be subject to damage awards or judgments prohibiting the use of our intellectual property. See Item 3, “Legal Proceedings,” for a description of a pending legal proceeding seeking to invalidate one of our design patents. In addition, our rights in our intellectual property, even if registered, may not be enforceable against any prior users of similar intellectual property. Furthermore, if we lose or fail to enforce any of our proprietary rights, our brand names, reputation, revenues and potential profitability may be negatively affected.

 

In addition, competing parties frequently file multiple suits to leverage patent portfolios across product lines, technologies and geographies and to balance risk and exposure between the parties. In some cases, several competitors may be parties in the same proceeding, or in a series of related proceedings, or litigate multiple features of a single class of devices. These forces frequently drive settlement not only of individual cases, but also of a series of pending and potentially related and unrelated cases. In addition, although monetary and injunctive relief is typically sought, remedies and restitution are generally not determined until the conclusion of the trial court proceeding and can be modified on appeal. Accordingly, the outcomes of individual cases are difficult to time, predict or quantify and are often dependent upon the outcomes of other cases in other geographies.

 

Patents and other proprietary rights are and will continue to be essential to our business, and our ability to compete effectively with other companies will be dependent upon the proprietary nature of our technologies. We rely upon trade secrets, know-how and continuing technological innovations to develop, maintain and strengthen our competitive position. We pursue a policy of generally seeking patent protection in the U.S. for patentable design or subject matter in our devices and attempt to review third-party patents and patent applications to the extent publicly available in order to develop an effective patent strategy, avoid infringement of third-party patents, identify licensing opportunities and monitor the patent claims of others. We own three U.S. design patents and have one U.S. utility patent application pending. We are not a party to any license agreements pursuant to which patent rights have been obtained or granted in consideration for cash, cross-licensing rights or royalty payments. No assurance can be made that any pending or future patent application will result in the issuance of patents, or that any future patents issued to, or licensed by, us will not be challenged or circumvented by our competitors. In addition, we may have to take legal action in the future to protect our patents, if any, trade secrets or know-how or to assert them against claimed infringement by others. Any legal action of that type could be costly and time consuming, and no assurances can be given that any lawsuit will be successful.

 

The invalidation of key patent or proprietary rights that we may own, or an unsuccessful outcome in lawsuits to protect our intellectual property, could have a material adverse effect on our business, financial position and results in operations.

 

Our trademarks are valuable, and any inability to protect them could reduce the value of our products and brands.

 

Our trademarks, trade secrets, and other intellectual property rights are important assets for us. Our trademarks “Thermomedics,” “Babytemp,” “Temp4sure,” Tempmature,” “Elitemp”, “Caregiver”, and “TouchFree” are registered with the U.S. Patent and Trademark Office. Protecting these intellectual property rights could be costly and time consuming, and any unauthorized use of our intellectual property could make it more expensive for us to do business and which also could harm our operating results.

 

Product warranties and product liabilities could be costly.

 

We typically warrant the workmanship and materials used in the products we sell. Failure of the products to operate properly or to meet specifications may increase our costs by requiring replacement or monetary reimbursement to the end user. To the extent we are unable to make a corresponding warranty claim against the manufacturer of the defective product, we would bear the loss associated with such warranties. In the ordinary course of our business, we may be subject to product liability claims alleging that products we sold failed or had adverse effects. We maintain liability insurance at a level which we believe to be adequate. A successful claim in excess of the policy limits of the liability insurance could materially adversely affect our business. There can be no assurance, however, that recourse against a manufacturer would be successful, or that our manufacturer maintains adequate insurance or otherwise would be able to pay such liability.

 

20  
 

 

Industry and Business Risks Related to Our Legacy Healthcare Businesses

 

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

 

In 2013, we licensed the assets related to our iglucose™ technology to Smart Glucose Meter and in 2015 we licensed our breath glucose detection system and its underlying patent, which was granted in 2014. Pursuant to these agreements, we are due royalties based on future product sales, if any. Should these businesses not generate significant revenues, we will not achieve royalty streams from these sales and licenses.

 

Implantation of our implantable microchip may be found to cause risks to a person’s health, which could adversely affect sales of our systems that incorporate the implantable microchip .

 

The implantation of the VeriChip, which we sold to VeriTeQ, may be found, or be perceived, to cause risks to a person’s health. Potential or perceived risks include adverse tissue reactions, migration of the microchip and infection from implantation. There have been articles published asserting, despite numerous studies to the contrary, that the implanted microchip causes malignant tumor formation in laboratory animals. If more people are implanted with our implantable microchip, it is possible that these and other risks to health will manifest themselves. Actual or perceived risks to a person’s health associated with the microchip implantation process could result in negative publicity and could damage our business reputation, leading to loss in sales of our other systems targeted at the healthcare market which would harm our business and negatively affect our prospects.

 

In connection with its acquisition of the VeriChip business, VeriTeQ agreed to indemnify us for any liabilities relating to the implantable microchip. Further, we are aware that VeriTeQ has sold the assets of the business to an unaffiliated third party who is using it as an identification device inside of a cosmetic implant, which does not involve direct in vivo use in people. If VeriTeQ or the buyer of the assets is unable to fulfill indemnity obligations, we could be responsible for payment of such liabilities, which could have a material adverse impact on our financial condition.

 

Risks Related to Our Common Stock

 

Future sales of our common stock may depress the market price of our common stock and cause stockholders to experience dilution.

 

The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, including shares issuable on the conversion of convertible notes payable. We may seek additional capital through one or more additional equity or convertible debt transactions in 2017; however, such transactions will be subject to market conditions and there can be no assurance any such transaction will be completed.

 

Current stockholders may experience dilution of their ownership interests because of the future issuance of additional shares of our common stock issued pursuant to convertible preferred stock and debt instruments.

 

In the future, we may issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our present stockholders and the purchasers of our common stock offered hereby. We are currently authorized to issue an aggregate of 20,000,000,000 shares of capital stock consisting of 19,995,000,000 shares of common stock and 5,000,000 shares of preferred stock with preferences and rights to be determined by our Board. As of March 22, 2017, there are 6,039,899,380 shares of our common stock, 2,262 of our Series II preferred stock and 71 of our Series J preferred stock outstanding. There are 3,619,449 shares of our common stock reserved for issuance pursuant to stock option agreements. We also have 2,692,800 shares of our common stock issuable upon the exercise of outstanding warrants. We also have convertible notes with approximate principal and accrued interest balances of $6,149,161 as of March 22, 2017. These notes and our Series II preferred stock are convertible into common stock in the future at prices determined at the time of conversion. The Series II, Series J and convertible notes would convert into shares of common stock, based on the closing bid price of $0.0002 on March 22, 2017, as follows:

 

    Principal/     Common Share Conversion  
    Liquidation     At Current     At 25%     At 50%     At 75%  
    Value     Market     Discount     Discount     Discount  
                               
Series II (1)   $ 2,344,343       11,721,712,500       15,628,950,000       23,443,425,000       46,886,850,000  
Series J (2)     71,000       355,000,000       473,333,333       710,000,000       1,420,000,000  
Convertible Notes (3)     6,149,161       48,770,412,944       40,994,405,349       61,491,608,024       122,983,216,047  
    $ 8,564,504       60,847,125,444       57,096,688,682       85,645,033,024       171,290,066,047  

 

  (1) Represents liquidation value, including accrued dividends, on 2,262 shares of Series II and convertible shares at the closing bid price of $0.0002 on March 22, 2017, at discounts of 25%, 50% and 75% from the closing price on March 22, 2017.
     
  (2) Represents liquidation value on 71 shares of Series J and convertible shares at the closing bid price of $0.0002 on March 22, 2017, at discounts of 25%, 50% and 75% from the closing price on March 22, 2017.
     
  (3) Represents liquidation value, including accrued interest, on the outstanding convertible notes and convertible shares at the closing bid price of $0.0002 on March 22, 2017, at discounts of 25%, 50% and 75% from the closing price on March 22, 2017.

 

21  
 

 

Any future issuance of our equity or equity-backed securities may dilute then-current stockholders’ ownership percentages and could also result in a decrease in the fair market value of our equity securities, because our assets would be owned by a larger pool of outstanding equity. As described above, we may need to raise additional capital through public or private offerings of our common or preferred stock or other securities that are convertible into or exercisable for our common or preferred stock. We may also issue such securities in connection with hiring or retaining employees and consultants (including stock options issued under our equity incentive plans), as payment to providers of goods and services, in connection with future acquisitions or for other business purposes. Our Board may at any time authorize the issuance of additional common or preferred stock without common stockholder approval, subject only to the total number of authorized common and preferred shares set forth in our certificate of incorporation. The terms of equity securities issued by us in future transactions may be more favorable to new investors, and may include dividend and/or liquidation preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect. Also, the future issuance of any such additional shares of common or preferred stock or other securities may create downward pressure on the trading price of the common stock. There can be no assurance that any such future issuances will not be at a price (or exercise prices) below the price at which shares of the common stock are then traded.

 

We do not anticipate declaring any cash dividends on our common stock.

 

Any future determination with respect to the payment of dividends will be at the discretion of the Board and will be dependent upon our financial condition, results of operations, capital requirements, general business conditions, terms of financing arrangements and other factors that our Board may deem relevant. In addition, our Certificates of Designation for shares of Series I, Series II and Series J Preferred Stock prohibit the payment of cash dividends on our common stock while any such shares of preferred stock are outstanding.

 

Our shares may be defined as “penny stock,” the rules imposed on the sale of the shares may affect your ability to resell any shares you may purchase, if at all.

 

Shares of our common stock may be defined as a “penny stock” under the Exchange Act, and rules of the SEC. The Exchange Act and such penny stock rules generally impose additional sales practice and disclosure requirements on broker-dealers who sell our securities to persons other than certain accredited investors who are, generally, institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 jointly with spouse, or in transactions not recommended by the broker-dealer. For transactions covered by the penny stock rules, a broker-dealer must make a suitability determination for each purchaser and receive the purchaser’s written agreement prior to the sale. In addition, the broker-dealer must make certain mandated disclosures in penny stock transactions, including the actual sale or purchase price and actual bid and offer quotations, the compensation to be received by the broker-dealer and certain associated persons, and deliver certain disclosures required by the SEC. Consequently, the penny stock rules may affect the ability of broker-dealers to make a market in or trade our common stock and may also affect your ability to resell any shares you may purchase in this offering in the public markets.

 

The success and timing of development efforts, clinical trials, regulatory approvals, product introductions, collaboration and licensing arrangements, any termination of development efforts and other material events could cause volatility in our stock price.

 

Since our common stock is thinly traded, its trading price is likely to be highly volatile and could be subject to extreme fluctuations in response to various factors, many of which are beyond our control, including (but not necessarily limited to):

 

success or lack of success in being awarded, as a subcontractor to The Boeing Company, the next stage procurement related to the BioWatch system;
   
success or lack of success in being awarded research and development contracts with U.S. Government agencies, related to our Firefly Dx product, or otherwise;
   
success or lack of success being granted patents for its core biological diagnostic and detection technologies;
   
introduction of competitive products into the market;
   
receipt of payments of any royalty payments under the sale and licensing agreements related to our legacy healthcare products;
   
unfavorable publicity regarding us or our products;
   
termination of development efforts of any product under development or any development or collaboration agreement.

 

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also significantly affect the market price of our common stock.

 

22  
 

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

Our corporate headquarters is located in Delray Beach, Florida, where we occupy approximately 3,000 square feet of office space, under a non-cancelable operating lease that expires on October 18, 2018. We also have operations in Pleasanton, California, where we lease approximately 6,250 square feet of laboratory and office space under a non-cancelable operating lease that expires on September 30, 2018. Additionally, we have operations in Concord, California, where we lease 12,000 square feet of office and plant space on a month-to-month basis for approximately $7,600 per month.

 

Item 3. Legal Proceedings

 

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

 

Exergen Litigation

 

On October 10, 2012, Thermomedics and its former parent company, Sanomedics(together “Sano”), received a cease and desist demand letter from Exergen Corporation(“Exergen”), claiming that Sano infringed on certain Exergen patents relating to Sano’s non-contact thermometers. On May 21, 2013, Exergen filed a complaint in the U.S. District Court of the District of Massachusetts against Sano. On September 3, 2013, Sano filed its answer to Exergen’s complaint and asserted counterclaims and affirmative defenses for non-infringement and invalidity of certain patents. On March 26, 2015, Exergen and Sano filed a partial dismissal that removes Sano’s previous product, the Talking Non-Contact Thermometer, from the lawsuit. On September 15, 2015, the United States District Court – District of Massachusetts, entered an order granting Sano’s motion for summary judgment, ruling that the patent claims made by Exergen against Sano were invalid. On June 22, 2016, the U.S. Court of Appeals affirmed the United States District Court – District of Massachusetts’ summary judgment decision in favor of Sano that the patent claims asserted against Sano by Exergen are invalid. The period for Exergen to object has expired.

 

LG Capital Funding Litigation

 

On March 7, 2017, LG Capital Funding, LLC(“LG”), filed a complaint in the U.S. District Court of the Eastern District of New York, related to a 10% Convertible Redeemable Note issued by us to LG on July 7, 2016 in the amount of $66,150(the “LG Note”). The LG Note provides that LG is entitled to convert all or any amount of the outstanding balance and accrued interest of the LG Note into shares of our Common Stock. The complaint alleges breach of contract and anticipatory breach of contract, asserting, among other things, that we failed to deliver shares of stock to LG pursuant to a notice of conversion, and failed to reserve a sufficient number of shares of stock issuable under the terms of the LG Note. The Company will answer and defend against this complaint.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

PART II

 

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

 

Our common stock is quoted on the OTC Bulletin Board under the symbol “PSID.” On March 22, 2017, the last reported bid price of our common stock was $0.0002 per share. The following table presents the high and low bid price for our common stock for the periods indicated:

 

Fiscal Year Ended December 31, 2016   High     Low  
Quarter ended December 31, 2016   $ 0.03     $ 0.0005  
Quarter ended September 30, 2016   $ 0.35     $ 0.02  
Quarter ended June 30, 2016   $ 0.95     $ 0.18  
Quarter ended March 31, 2016   $ 1.13     $ 0.55  

 

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Fiscal Year Ended December 31, 2015   High     Low  
Quarter ended December 31, 2015   $ 2.00     $ 1.00  
Quarter ended September 30, 2015   $ 2.50     $ 1.00  
Quarter ended June 30, 2015   $ 2.50     $ 0.50  
Quarter ended March 31, 2015   $ 1.50     $ 1.00  

 

Holders

 

According to the records of our transfer agent, as of March 22, 2017, there were approximately 79 holders of record of our common stock, which number does not reflect beneficial stockholders who hold their stock in nominee or “street” name through various brokerage firms.

 

Dividend Policy

 

Any future determination with respect to the payment of dividends on our common stock will be at the discretion of our Board and will be dependent upon our financial condition, results of operations, capital requirements, general business conditions, terms of financing arrangements and other factors that our Board may deem relevant.

 

Recent Sales of Unregistered Securities

 

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

 

  1. During the quarter ended December 31, 2016, we issued approximately 945 million shares of our common stock to a lender in connection with the conversion of promissory notes. The notes were converted at an average price per share of $0.0008.
     
  2. During the quarter ended December 31, 2016, we issued approximately 715 million shares of our common stock to a second lender in connection with the conversion of promissory notes. The notes were converted at an average price per share of $0.0007.
     
  3. During the quarter ended December 31, 2016, we issued approximately 30 million shares of our common stock to a third lender in connection with the conversion of promissory notes. The notes were converted at an average price per share of $0.0036.
     
  4. During the quarter ended December 31, 2016, we issued approximately 141 million shares of our common stock to a fourth lender in connection with the conversion of promissory notes. The notes were converted at an average price per share of $0.0009.
     
  5. During the quarter ended December 31, 2016, we issued approximately 81 million shares of our common stock to a fifth lender in connection with the conversion of promissory notes. The notes were converted at an average price per share of $0.0071.
     
  6. During the quarter ended December 31, 2016, we issued approximately 20 million shares of our common stock to a sixth lender in connection with the conversion of promissory notes. The notes were converted at an average price per share of $0.0030.
     
  7 . During the quarter ended December 31, 2016, we issued approximately 167 million shares of our common stock to a seventh lender in connection with the conversion of promissory notes. The notes were converted at an average price per share of $0.0012.
     
  8 . During the quarter ended December 31, 2016, we issued approximately 177 million shares of our common stock to an eighth lender in connection with the conversion of promissory notes. The notes were converted at an average price per share of $0.0007.
     
  9 . During the quarter ended December 31, 2016, we issued approximately 193 million shares of our common stock to a ninth lender in connection with the conversion of promissory notes. The notes were converted at an average price per share of $0.0005.
     
  10. During the quarter ended December 31, 2016, we issued approximately 90 million shares of our common stock to a tenth lender in connection with the conversion of promissory notes. The notes were converted at an average price per share of $0.0005.
     
  11.

During the quarter ended December 31, 2016, we issued approximately 69 million shares of our common stock to an eleventh lender in connection with the conversion of promissory notes. The notes were converted at an average price per share of $0.0004.

     
  12.

During the quarter ended December 31, 2016, we issued approximately 7 million shares of our common stock to a twelfth ender in connection with the conversion of promissory notes. The notes were converted at an average price per share of $0.0071.

 

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

 

Item 6. Selected Financial Data

 

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

 

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

 

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

 

Overview

 

PositiveID is a life sciences and technology company focused primarily on the healthcare and homeland security markets. Since its inception, and prior to acquisition, PositiveID, through its wholly-owned subsidiary PDI, has received over $50 million in government grants and contract work from the Department of Defense, DHS, the Federal Bureau of Investigation, the National Aeronautics and Space Administration, the Defense Advanced Research Projects Agency and industrial clients. The Company’s M-BAND(Microfluidic Bio-agent Autonomous Networked Detector) system is an airborne bio-threat detection system developed for the homeland defense industry, to detect biological weapons of mass destruction. PositiveID is currently developing the Firefly Dx, an automated pathogen detection system for rapid diagnostics, both for clinical and point-of-need applications. PositiveID has a substantial portfolio of intellectual property related primarily to sample preparation and rapid medical testing applications.

 

On December 4, 2015, the Company entered into a stock purchase agreement and a control agreement giving it complete operational control of Thermomedics. and its FDA-cleared Caregiver® product. Caregiver® is a clinical grade, infrared thermometer for measurement of forehead temperature in adults, children, and infants, without contact. It delivers an oral-equivalent temperature directly from the forehead in 1-2 seconds. Since there is no skin contact and Caregiver® does not require probe cover supplies, it reduces the risk of cross-contamination, which is an increasing concern, and saves healthcare facilities the cost of covers. The results of the Caregiver® business are included in the Medical Devices segment. The Company closed the stock purchase agreement and completed the acquisition of the capital stock of Thermomedics on August 25, 2016.

 

On December 24, 2015, the Company acquired ENG, a leader in mobile labs, homeland security and communications vehicles. The fastest growing aspect of ENG’s business over the last decade has been its mobile labs segment, which includes chemical, biological, nuclear, radiological and explosives testing in the field. ENG designs and builds these labs to customer specification in its facilities in Concord, California. The results of ENG are included in the Mobile Labs Segment.

 

Results of Operations

 

The Company operates in three segments: Molecular Diagnostics, Medical Devices, and Mobile Labs.

 

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

 

During 2015, the Company operated in a single segment. The following is the selected segment data for the year ended December 31, 2016.

 

    Year Ended December 31,  
    2016     2015  
    Mobile Labs     Medical Devices     Molecular Diagnostics     Corporate     Total     Total  
Revenue   $ 5,027     $ 417     $ 115     $     $ 5,559     $ 2,940  
Cost of revenue     3,420       109       8             3,537       335  
                                                 
Gross profit     1,607       308       107             2,022       2,605  
                                                 
Selling, general and administrative     1,864       614       651       5,600       8,729       5,611  
Research and development           156       284             440       1,420  
                                                 
Total operating expenses     1,864       770       935       5,600       9,169       7,031  
Operating (loss)   $ (257 )   $ (462 )   $ (828 )   $ (5,600 )   $ (7,147 )   $ (4,426 )

 

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Revenue

 

Revenue increased 89% from $2.9 million to $5.6 million for the years ended December 31, 2015 and 2016, respectively. During 2015, the Company recognized $2.5 million received in conjunction with the Boeing License Agreement as revenue. The increased revenue between 2015 and 2016 was attributable to the Company’s acquisition of ENG and Thermomedics in December 2015, resulting in the Medical Device and Mobile Labs segments reporting for the year ended December 31, 2016. The majority of the Company’s revenues are currently generated from its Mobile Labs segment. Such revenue is recorded at the completion and delivery of mobile lab and telecommunications vehicles. As individual projects are usually material, revenues can vary materially period to period based on the timing of such deliveries.

 

Cost of Revenue and Gross Profit

 

Cost of revenue consist of inventory cost and compensation expense for employees and consultants working directly on the Company’s revenue producing products and agreements. Cost of revenue was $3.5 million and $0.3 million for years ended December 31, 2016 and 2015, respectively. Gross profit decreased from $2.6 million to $2.0 million during the year ended December 31, 2015 and 2016, respectively. The change in cost of revenue and gross profit was attributable to the recognition of the Boeing license in 2015 and Company’s acquisition of ENG and Thermomedics in December 2015, resulting in the Medical Device and Mobile Labs segments reporting for the year ended December 31, 2016. The $2.5 million of license revenue recognized on the Boeing license had no associated cost of revenue.

 

Selling, General and Administrative Expense

 

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

 

Selling, general and administrative expense increased by approximately $3.1 million, or 56%, for the year ended December 31, 2016 compared to the year ended December 31, 2015. This increase was primarily driven by selling, general and administrative costs at our Mobile Lab and Medical Device segments, which were both acquired in December 2015, and the incremental difference in fair value of the Series I and Series II preferred stock, resulting in a charge of approximately $2.0 million recorded as stock based compensation This stock based compensation charge is one-time non-cash expense item.

 

Research and Development

 

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

 

Research and development expense decreased by approximately $1.0 million or 71%, from $1.4 to $0.4 million, for the year ended December 31, 2015 compared to the year ended December 31, 2016. The decrease was primarily attributable to the decrease in labor, and engineering costs related to the development of Firefly Dx product. The Company does not expect to increase its research and development expenses until it arranges contractual or strategic arrangements to share in the costs of that development.

 

Change in Fair Value of Embedded Conversion Option Liability

 

The change in fair value of embedded conversion option liability changed from an expense of $2.4 million in 2015 to income of $1.6 million in 2016 for a difference of approximately $4 million or 166%. The change was primarily attributed to the revaluation of the embedded conversion option liability from December 31, 2015 to December 31, 2016. This is a non-cash income/expense item.

 

Interest Expense and Other Income(Expense)(net)

 

Interest expense increased by approximately $2.9 million or 61%, for the year ended December 31, 2016 compared to the year ended December 31, 2015. The increase was primarily attributed to the amortization of fair value premiums and debt discounts related to the increased level of borrowing, through convertible notes for the year ended December 31, 2016. The amortization of fair value premiums and debt discounts are non-cash income/expense items.

 

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Other income, net, decreased by approximately $389,000 or 97%, for the year ended December 31, 2016 compared to the year ended December 31, 2015. The decrease was primarily attributed to the 2015 exercise of the VeriTeQ warrants and the gain on sale of VeriTeQ shares.

 

Liquidity and Capital Resources

 

As of December 31, 2016, cash totaled approximately $40,000 compared to cash of approximately $173,000 at December 31, 2015.

 

Cash Flows from Operating Activities

 

Net cash used in operating activities totaled approximately $3.6 million during the year ended December 31, 2016 and approximately $4.5 million during the year ended December 31, 2015, primarily to fund operating losses. This decrease in cash used in operating activities was primarily the result of decrease in operating costs related to the development of Firefly Dx product and Company marketing programs.

 

Cash Flows from Investing Activities

 

Net cash used in investing activities totaled approximately $15,000 during the year ended December 31, 2016 and totaled $649,000 during the year ended December 31, 2015. The decrease was primarily due to the acquisition of Thermomedics and ENG in 2015, net proceeds received in 2015 from the sales of the Company’s warrant position in VeriTeQ.

 

Cash Flows from Financing Activities

 

Financing activities provided net cash of approximately $3.5 million and $5.2 million during the years ended December 31, 2016 and 2015, respectively, primarily related to proceeds from the issuance of convertible notes and debentures.

 

Financial Condition

 

As of December 31, 2016, we had a working capital deficit, stockholders’ deficit and accumulated deficit of approximately $10.3 million $8.9 million and $157.2 million, respectively. Net loss and net cash used in operations was $13.1 million, and $3.6 million respectively, in 2016 compared to a working capital deficit of approximately $10.7 million a stockholders’ deficit of approximately $11.8 million and an accumulated deficit of approximately $144.2 million of December 31, 2015. The change in working capital was primarily due to operating losses for the period, offset by cash received from capital raised through convertible debt financings, that was spent on operations.

 

We have incurred operating losses and net cash used in operating activities since the merger that created PositiveID. The current operating losses are the result of research and development expenditures, selling, general and administrative expenses related to our molecular diagnostics and detection and Caregiver® products. We expect our operating losses to continue through 2017. It’s management’s opinion that these conditions raise substantial doubt about our ability to continue as a going concern.

 

Our ability to continue as a going concern is dependent upon our ability to obtain financing to fund the continued development of our products and to support working capital requirements. Until we are able to achieve operating profits, we will continue to seek to access the capital markets. In 2015 and 2016, we raised approximately $5.9 and $3.8 million, respectively from the issuance of convertible debt.

 

During 2017, we will need to raise additional capital, including capital not currently available under our current financing agreements in order to execute our business plan.

 

The Company intends to continue to access capital to provide funds to meet its working capital requirements for the near-term future. In addition, and if necessary, the Company could reduce and/or delay certain discretionary research, development and related activities and costs. However, there can be no assurances that the Company will be able to negotiate additional sources of equity or credit for its long-term capital needs. The Company’s inability to have continuous access to such financing at reasonable costs could materially and adversely impact its financial condition, results of operations and cash flows, and result in significant dilution to the Company’s existing stockholders. The Company’s consolidated financial statements do not include any adjustments relating to recoverability of assets and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Critical Accounting Policies and Estimates

 

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

 

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Revenue Recognition

 

Revenue is recognized when persuasive evidence of an arrangement exists, collectability of arrangement consideration is reasonably assured, the arrangement fees are fixed or determinable and delivery in accordance with the customer contract or purchase order.

 

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

 

To date, the Company has generated revenue from three sources:(1) professional services, (2) technology licensing, and (3) product sales.

 

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

 

  (1) Revenues for professional services, which are of short term duration, are recognized when services are provided;
     
  (2) Technology license revenue is recognized upon the completion of all terms of that license. Payments received in advance of completion of the license terms are recorded as deferred revenue; and
     
  (3) Revenue from sales of the Company’s products is recorded when risk of loss has passed to the buyer and criteria for revenue recognition discussed above is met. Payments received in advance of delivery and revenue recognition are recorded as deferred revenue.

 

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

 

Intangible Assets and Goodwill

 

Intangible assets are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful lives. Customer contracts and relationships are being amortized over a period of 3 years, patents and other intellectual property are being amortized over a period of 5 years, and non-compete agreements are being amortized over 2 years.

 

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

 

The Company records goodwill as the excess of the purchase price over the fair values assigned to the net assets acquired in business combinations. Goodwill is allocated to reporting units as of the acquisition date for the purpose of goodwill impairment testing. The Company’s reporting units are those businesses for which discrete financial information is prepared. ASC 350, “Intangibles — Goodwill and Other” requires that intangible assets with indefinite lives, including goodwill, be evaluated on an annual basis for impairment or more frequently if an event occurs or circumstances change that could potentially result in impairment. The goodwill impairment test requires the allocation of goodwill and all other assets and liabilities to reporting units. If the fair value of the reporting unit is less than the book value (including goodwill), then goodwill is reduced to its implied fair value and the amount of the write-down is charged to operations. We are required to test our goodwill and intangible assets with indefinite lives for impairment at least annually.

 

Stock-Based Compensation

 

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

 

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The Company estimates the fair value of stock-based compensation awards on the date of grant using the Black-Scholes-Merton (“BSM”) option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and are freely transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The BSM option pricing model considers, among other factors, the expected term of the award and the expected volatility of the Company’s stock price. Expected terms are calculated using the Simplified Method, volatility is determined based on the Company’s historical stock price trends and the discount rate is based upon treasury rates with instruments of similar expected terms. Warrants granted to non-employees are accounted for in accordance with the measurement and recognition criteria of ASC Topic 505-50, Equity Based Payments to Non-Employees.

 

The Black-Scholes model, which the Company uses to determine compensation expense, requires the Company to make several key judgments including:

 

the value of the Company’s common stock;
   
the expected life of issued stock options;
   
the expected volatility of the Company’s stock price;
   
the expected dividend yield to be realized over the life of the stock option; and
   
the risk-free interest rate over the expected life of the stock options.

 

The Company’s computation of the expected life of issued stock options was determined based on historical experience of similar awards giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations about employees’ future length of service. The interest rate was based on the U.S. Treasury yield curve in effect at the time of grant. The computation of volatility was based on the historical volatility of the Company’s common stock.

 

Compensation expense for all stock-based employee and director compensation awards granted is based on the grant date fair value estimated in accordance with the provisions of ASC Topic 718, Stock Compensation (“ASC Topic 718”). The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the vesting term. Vesting terms vary based on the individual grant terms.

 

Accounting for Income Taxes

 

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

 

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

 

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

 

We continue to fully recognize our tax benefits, which are offset by a valuation allowance to the extent that it is more likely than not that the deferred tax assets will not be realized. We have analyzed our filing positions in all of the foreign, federal and state jurisdictions where the Company is required to file income tax returns, as well as all open tax years in these jurisdictions. As a result, we have not recorded a tax liability and have no unrecognized tax benefits as of December 31, 2016 or 2015, other than a repayment of Canadian tax obligations advanced by Stanley.

 

Accounting for Derivatives

 

The Company evaluates its convertible debt, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for. The result of this accounting treatment is that under certain circumstances the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity without gain or loss. Equity instruments that are initially classified as equity that become subject to reclassification under this accounting standard are reclassified to liability at the fair value of the instrument on the reclassification date.

 

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Fair Value of Financial Instruments and Fair Value Measurements

 

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

 

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

 

  Level 1: Observable inputs such as quoted prices(unadjusted) in active markets for identical assets or liabilities.
     
  Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
     
  Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

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

 

Item 8. Financial Statements and Supplementary Data

 

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

 

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

 

None.

 

Item 9A. Controls and Procedures

 

Disclosure Controls and Procedures

 

Evaluation of Disclosure Controls . We evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” as defined in Rule 13a-15(e) under the Exchange Act as of December 31, 2016. This evaluation (the “disclosure controls evaluation”) was done under the supervision and with the participation of management, including the person(s) performing the function of our chief executive officer (“CEO”) and acting chief financial officer (“CFO”). Rules adopted by the SEC require that in this section of this Report we present the conclusions of the CEO and CFO about the effectiveness of our disclosure controls and procedures as of December 31, 2016 based on the disclosure controls evaluation.

 

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

 

Conclusion . Based upon the disclosure controls evaluation, our CEO and acting CFO had concluded that, as of December 31, 2016, our disclosure controls and procedures were effective to provide reasonable assurance that the foregoing objectives are achieved.

 

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Management’s Annual Report on Internal Control Over Financial Reporting

 

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

 

Under the supervision and with the participation of management, including the CEO and acting CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting, as of December 31, 2016, based upon the framework in Internal Control — Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation under the framework in Internal Control — Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2016.

 

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

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph(d) of Rule 13a-15 under the Exchange Act that occurred during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information

 

None.

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

Directors

 

Our directors, their ages and business experience, as of March 22, 2017, are set forth below:

 

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

 

William J. Caragol, 50 , has served as our Chief Executive Officer since August 26, 2011 and as our Chairman of the Board of Directors since December 6, 2011 and previously served as our President from May 2007 until August 26, 2011, and Treasurer since December 2006. Since September 28, 2012, Mr. Caragol has also been our acting CFO. Previously Mr. Caragol was the CFO of Millivision Technologies and was a Senior Manager with Deloitte & Touche LLP. Mr. Caragol has served as a member of the Board of Directors of several public and private technology companies. He is a member of the American Institute of Certified Public Accountants and graduated from the Washington & Lee University with a bachelor of science in Administration and Accounting. The Board of Directors nominated Mr. Caragol as a director because of his past experience as a senior executive of other companies in the technology industry and because he holds the position of chief executive officer.

 

Jeffrey S. Cobb, 55 , has served as a member of our Board of Directors since March 2007. Since April 2004, Mr. Cobb is the Chief Operating Officer of IT Resource Solutions.net, Inc. He is also Chief Executive Officer of Precision Background Screeners, a company he founded in 2016. Mr. Cobb served as a member of the Board of Directors of Steel Vault from March 2004 through July 22, 2008. Mr. Cobb earned his bachelor of science in Marketing and Management from Jacksonville University. Mr. Cobb was nominated to the Board of Directors because of his management and business development experience in technology companies.

 

31  
 

 

Michael E. Krawitz, 47, has served as a member of our Board of Directors since November 2008. He currently serves as Senior Vice President, General Counsel and Corporate Secretary of York Risk Services Group, Inc. and its affiliated entities. From January 2014 to June 2015, he served as Chief Legal and Financial Officer of VeriTeQ Corporation. From November 2010 to January 2014 he served as CEO and general counsel of PEAR, LLC, a company that finances renewable energy and energy efficiency projects throughout the United States. From June 2010 until February 2011, he served as CEO of Florida Sunshine Investments I, Inc. He previously served as the chief executive officer and president of Digital Angel Corporation from December 2006 to December 2007, executive vice president, general counsel and secretary from March 2003 until December 2006, and as a member of its Board of Directors from July 2007 until December 2007. Mr. Krawitz served as a member on the Board of Directors of Steel Vault from July 2008 until November 2009. Mr. Krawitz earned a bachelor of arts degree from Cornell University and a juris doctorate from Harvard Law School. Mr. Krawitz was nominated to the Board of Directors due to his past experience as a CEO of Digital Angel, our former parent company, as well as his experience as an attorney.

 

Ned L. Siegel, 65 , has served as a member of our Board of Directors since February 2011. Ambassador Siegel has had a long and distinguished career as a senior U.S. government official and businessman. He was appointed by then President George W. Bush as the U.S. Ambassador to the Commonwealth of the Bahamas from October 2007 to January 2009. He was also appointed by President Bush to serve under Ambassador John R. Bolton at the United Nations in New York, serving as the Senior Advisor to the U.S. Mission and as the U.S. representative to the 61st Session of the United Nations General Assembly. Prior to his ambassadorship, he was appointed to the Board of Directors of the Overseas Private Investment Corporation (OPIC). In addition to his public service, Ambassador Siegel has over 30 years of entrepreneurial successes. Presently, he serves as President of The Siegel Group, a multi-disciplined international business management advisory firm specializing in infrastructure, real estate, ports, energy, technology, financial and cyber security services. Ambassador Siegel also serves on the Board of Directors and Advisory Boards of other numerous public and private companies, and private equity groups. He graduated Phi Beta Kappa from the University of Connecticut in 1973 and received a juris doctorate from the Dickinson School of Law in 1976. In December 2014, he received an honorary degree of Doctor of Business Administration from the University of South Carolina.

 

Executive Officers

 

Our executive officers, their ages and positions, as of March 22, 2017, are set forth below:

 

Name   Age   Position
William J. Caragol   50   Chairman of the Board, CEO and Acting CFO
Lyle L. Probst   46   President

 

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

 

Lyle L. Probst, 46 , has served as our President since April 2014 and previously served as our vice president of operations and product development from May 2011 until April 2014. He has 15 years of management experience with large bio-detection programs and products, and joined PositiveID in 2011 at the time that PositiveID acquired Microfluidic Systems. Mr. Probst joined Microfluidic Systems in February 2007 and served as the director of project management until February 2010, and then served as the senior director of project management until April 2011. At Microfluidic Systems, Mr. Probst managed a series of programs such as the Department of Homeland Security Science & Technology BAND (Bioagent Autonomous Networked Detector) program. Before joining Microfluidic Systems, Mr. Probst directed bio-detection programs at Lawrence Livermore National Laboratory (“LLNL”) as a biomedical scientist project manager from February 2000 until February 2007. While he was at LLNL, he was instrumental in the development and deployment of BioWatch Generation 1, and was principal investigator/developer of the high-throughput BioWatch mobile laboratory and a subject matter expert within the Biodefense Knowledge Center. Mr. Probst was previously the Director of Capillary Electrophoresis and Director of Chemistries at the Joint Genome Institute. He holds a B.S. in Biology and an M.B.A in Executive Management.

 

Audit Committee

 

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

 

32  
 

 

The audit committee assists our Board in its oversight of:

 

our accounting, financial reporting processes, audits and the integrity of our financial statements;
   
our independent auditor’s qualifications, independence and performance;
   
our compliance with legal and regulatory requirements;
   
our internal accounting and financial controls; and
   
our audited financial statements and reports, and the discussion of the statements and reports with management, including any significant adjustments, management judgments and estimates, new accounting policies and disagreements with management.

 

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

 

Certain Legal Proceedings

 

To the best of our knowledge, none of our directors or executive officers has, during the past ten years:

 

been convicted in a criminal proceeding or been subject to a pending criminal proceeding(excluding traffic violations and other minor offenses);
   
had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
   
been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
   
been found by a court of competent jurisdiction in a civil action or by the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
   
been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated(not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
   
been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.

 

Compliance with Section 16(a) of the Exchange Act

 

Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who beneficially own 10% or more of a class of securities registered under Section 12 of the Exchange Act to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Directors, executive officers and greater than 10% stockholders are required by the rules and regulations of the SEC to furnish the Company with copies of all reports filed by them in compliance with Section 16(a).

 

Based solely on our review of certain reports filed with the Securities and Exchange Commission pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, the reports required to be filed with respect to transactions in our common stock during the fiscal year ended December 31, 2016, were timely.

 

33  
 

 

Code of Business Conduct and Ethics

 

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

 

Item 11. Executive Compensation

 

The following table sets forth information regarding compensation earned in or with respect to our fiscal year 2016 and 2015 by:

 

each person who served as our CEO in 2016; and
   
each person who served as our CFO in 2016; and
   
each person who served as our President in 2016.

 

We had no other executive officers during any part of 2016.

 

Summary Compensation Table

 

Name and
Principal Position
  Year     Salary
($)
    Bonus
($)
    Stock
Awards
($)
    Option
Awards
($)
    Non-Equity
Incentive
Plan
Compensation
($)
    All Other
Compensation
($)
    Total
($)
 
                                                 
William J. Caragol     2016       275,000 (1)     250,000 (2)           498,350 (3)           62,790 (4)     1,086,140  
Chairman, Chief Executive Officer and Acting Chief Financial Officer     2015       200,000 (1)     345,000 (5)                       55,812 (6)     600,812  
                                                                 
Lyle Probst     2016       200,000 (7)     250,000 (8)           299,010 (9)                 749,010  
President     2015       200,000 (7)     237,500 (10)                             437,500  

 

(1) Represents the $275,000 and $200,000 salary pursuant to Mr. Caragol’s employment contract for 2016 and 2015, respectively. Pursuant to Mr. Caragol’s employment contract, $75,000 of Mr. Caragol’s salary was deferred and paid as working capital allows. At December 31, 2016 $2,000 of Mr. Caragol’s salary has been accrued.
   
(2)

Represents the grant date fair value of 250 Series II shares issued as a component of Mr. Caragol’s 2016 incentive compensation. The Series II shares were issued subsequent to December 31, 2016 and will vest on January 1, 2019.

   
(3) Represents the (i) grant date fair value of 500,000 options to purchase Company common stock as a component of Mr. Caragol’s 2016 incentive compensation. These options were issued on January 7, 2016 and will vest;(i) 170,000 on January 1, 2017; (ii) 165,000 on January 1, 2018; (iii) 165,000 on January 1, 2019.
   
(4) The amount shown includes (i) $25,000 for an expense allowance, and (ii) $37,790 for an automobile lease, insurance and gasoline expenses.
   
(5) Represents the(i) grant date fair value of 150 Series I shares issued as a component of Mr. Caragol’s 2015 incentive compensation and $150,000 accrued incentive compensation for 2015. The Series I shares were issued on December 22, 2015 and will vest on January 1, 2018. $12,000 of the accrued incentive compensation was paid during 2016 and the remaining $138,000 will be paid in the future as working capital allows.
   
(6) The amount shown includes (i) $25,000 for an expense allowance, and (ii) $30,812 for an automobile lease, insurance and gasoline expenses.
   
(7) Represents a salary of $200,000. Mr. Probst was appointed President of the Company on April 16, 2014.
   
(8)

Represents the grant date fair value of 250 Series II shares issued as a component of Mr. Probst’s 2016 incentive compensation. The Series II shares were issued subsequent to December 31, 2016 and will vest on January 1, 2019.

   
(9) Represents the (i) grant date fair value of 300,000 options to purchase Company common stock as a component of Mr. Probst’s 2016 incentive compensation. These options were issued on January 7, 2016 and will vest; (i) 102,000 on January 1, 2017; (ii) 99,000 on January 1, 2018; (iii) 99,000 on January 1, 2019.
   
(10) Represents the grant date fair value of 125 Series I shares issued as a component of Mr. Probst’s 2015 incentive compensation and $75,000 accrued incentive compensation for 2015. The Series I shares were issued on December 22, 2015 and will vest on January 1, 2018. $6,000 of the accrued incentive compensation was paid during 2016 and the remaining $69,000 will be paid in the future as working capital allows.

 

34  
 

 

Narrative Disclosure to Summary Compensation Table and Additional Narrative Disclosure

 

Executive Employment Arrangements

 

Amendments to 2011 Executive Employment Arrangements

 

Mr. Caragol’s annual base salary was increased from $200,000 to $275,000 in connection with his appointment as our CEO effective August 26, 2011.

 

On December 6, 2011, the Compensation Committee approved a First Amendment to Employment and Non-Compete Agreement (“First Amendment”), between the Company and William J. Caragol, our CEO, in connection with Mr. Caragol’s assumption of the position of chairman of the Board effective December 6, 2011. The First Amendment amends the Employment and Non-Compete Agreement dated November 11, 2010, between the Company and Mr. Caragol and provides for, among other things, the elimination of any future guaranteed raises and bonuses, other than a 2011 bonus of $375,000 to be paid beginning January 1, 2012 in twelve (12) equal monthly payments. This bonus was not paid during 2012 and on January 8, 2013, $300,000 of such bonus was converted into 14,778 shares of our restricted common stock, which vest on January 1, 2016. The remaining $75,000 was paid in 2013. In addition, the First Amendment amends the change of control provision by increasing the multiplier from 3 to 5 and capping any change in control compensation to 10% of the transaction value. The First Amendment also obligated us to grant to Mr. Caragol an aggregate of 10,000 shares of restricted stock over a 4 year period as follows: (i) 2,000 shares upon execution of the First Amendment, which shall vest on January 1, 2014, (ii) 2,000 shares on January 1, 2012, which shall vest on January 1, 2015, (iii) 2,000 shares on January 1, 2013, which shall vest on January 1, 2015, (iv) 2,000 shares on January 1, 2014, which shall vest on January 1, 2018, and (v) 2,000 shares on January 1, 2015, which shall vest on January 1, 2018. We and Mr. Caragol agreed to delay the issuance of the first and second restricted share grants, for a total of 4,000 shares, until we had available shares under one of our stock incentive plans. The restricted shares were granted on October 4, 2012. Upon a change in control or in the event that Mr. Caragol terminates his employment for “constructive termination” (as such term is defined his employment agreement) or in the event we terminate his employment without cause, the restricted stock described above shall be issued within five (5) business days of such triggering event and all of the restricted stock shall vest immediately. If Mr. Caragol resigns, is terminated for cause, or his employment is terminated due to his death or disability, Mr. Caragol will forfeit the restricted shares discussed above.

 

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

 

2016 Executive Employment Arrangements

 

On April 8, 2016, the Company entered into employment contracts with both Mr. Caragol and Mr. Probst, effective January 1, 2016. The terms of Mr. Caragol’s employment contract include a three-year term and a salary of $275,000. Mr Caragol’s salary will automatically adjust to $350,000 at the time that PositiveID’s common stock is listed on a national exchange. Mr. Caragol is eligible for annual bonuses and was granted 500,000 stock options, which vest; (i) 170,000 on January 1, 2017; (ii) 165,000 on January 1, 2018; (iii) 165,000 on January 1, 2019. These options will expire on January 1, 2021. Mr. Caragol is also entitled to the use of a Company car and related expenses and an unaccountable expense allowance of $25,000. The terms of Mr. Probst’s employment contract include a three-year term and a salary of $200,000. Mr. Probst’s salary will automatically adjust to $250,000 at the time that PositiveID’s common stock is listed on a national exchange. Mr. Probst is eligible for annual bonuses and was granted 300,000 stock options, which vest; (i) 102,000 on January 1, 2017; (ii) 99,000 on January 1, 2018; (iii) 99,000 on January 1, 2019. These options will expire on January 1, 2021.

 

If either Mr. Caragol or Mr. Probst’s employment is terminated prior to the expiration of the term of his employment agreement, certain significant payments become due. The amount of such payments depends on the nature of the termination. In addition, the employment agreement contains a change of control provision that provides for the payment of 2.0 times and 2.95 times in the case of Mr. Probst and Mr. Caragol, respectively of the then current base salary and the same multipliers of the highest bonus paid to the executive during the three calendar years immediately prior to the change of control. Any outstanding stock options or restricted shares held by the executive as of the date of his termination or a change of control become vested and exercisable as of such date, and remain exercisable during the remaining life of the option. The employment agreement also contains non-compete and confidentiality provisions which are effective from the date of employment through two years from the date the employment agreement is terminated.

 

Outstanding Equity Awards as of December 31, 2016

 

The following table provides information as of December 31, 2016, regarding unexercised stock options and restricted stock outstanding held by Messrs. Caragol and Probst:

 

35  
 

 

Outstanding Equity Awards as of December 31, 2016

 

 

    Option Awards     Stock Awards  
Name   Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
    Number of
Securities
Underlying
Unexercised
Options(#)
Unexercisable
    Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
    Option
Exercise
Price
($)
    Option
Expiration
Date
    Number
of Shares
or Units
of Stock
That
Have Not
Vested
(#)
    Market
Value
of
Shares
or
Units of
Stock
That
Have
Not
Vested
($)
    Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)
    Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
($)
 
William J. Caragol           500,000 (1)         $ 1.02       1/1/2021       36,778 (2)(3)   $ 26 (4)            
                                                       
                                                                         
Lyle Probst     60                 $ 462.50       5/23/2021                          
      20                 $ 287.50       8/31/2021                          
      20                 $ 287.50       8/31/2022                          
      400                 $ 50.00       6/06/2022                          
            300,000 (5)         $ 1.02       1/1/2021                          
                                    12,226 (6)   $ 9 (4)            

 

(1) Mr. Caragol was granted 500,000 options to purchase Company common stock, issued on January 7, 2016. These options will vest;(i) 170,000 on January 1, 2017;(ii) 165,000 on January 1, 2018;(iii) 165,000 on January 1, 2019.
   
(2) Mr. Caragol owns, as of December 31, 2016, an aggregate of 36,778 unvested shares of common stock which will vest on January 1, 2018.
   
(3) Pursuant to Mr. Caragol’s employment agreements we are obligated to grant to Mr. Caragol an aggregate of 10,000 shares of restricted stock over a 4 year period as follows: (i) 2,000 shares upon execution of the agreement, which shall vest on January 1, 2014, (ii) 2,000 shares on January 1, 2012, which shall vest on January 1, 2015, (iii) 2,000 shares on January 1, 2013, which shall vest on January 1, 2015, (iv) 2,000 shares on January 1, 2014, which shall vest on January 1, 2018, and (v) 2,000 shares on January 1, 2015, which shall vest on January 1, 2018. Upon a change in control or in the event that Mr. Caragol terminates his employment for “constructive termination” (as such term is defined his employment agreement) or in the event we terminate his employment without cause, the restricted stock described above shall be issued within five (5) business days of such triggering event and all of the restricted stock shall vest immediately. If Mr. Caragol resigns, is terminated for cause, or his employment is terminated due to his death or disability, Mr. Caragol will forfeit the restricted shares discussed above.
   
(4) Computed by multiplying the closing market price of a share of our common stock on December 31, 2016, or $0.0007, by the number of shares of common stock that have not vested.
   
(5) Mr. Probst was granted 300,000 options to purchase Company common stock, issued on January 7, 2016. These options will vest;(i) 102,000 on January 1, 2017; (ii) 99,000 on January 1, 2018; (iii) 99,000 on January 1, 2019.
   
(6) Mr. Probst was granted 4,893 of restricted stock on January 8, 2013 and 7,333 of restricted stock on April 16, 2014 as employee incentive compensation for 2012 and 2014, respectively. These restricted shares will vest on January 1, 2018.

 

36  
 

 

Director Compensation

 

The following table provides compensation information for persons serving as members of our Board of Directors during 2016:

 

2016 Director Compensation

 

Name   Fees
Earned
or Paid
in Cash
($)(1)
    Stock
Awards
($)
    Option
Awards
($)(2)
   

Non-Equity
Incentive

Plan
Compensation
($)

    Nonqualified
Deferred
Compensation
Earnings
    All Other
Compensation
($)(3)
    Total
($)
 
Jeffrey S. Cobb     20,000             63,137                   32,500       115,637  
Michael E. Krawitz     20,000             63,137                   32,500       115,637  
Ned L. Siegel     20,000             63,137                   32,500       115,637  

 

  (1) These fees are comprised of $5,000 per quarter, per director
     
  (2) Each non-executive board member was granted 60,000 options to purchase Company common stock on December 22, 2015, which vest on December 31, 2016. These grants were components of 2016 equity compensation.
     
  (3) Each non-executive board member was granted 25 Series I convertible preferred stock on December 22, 2015, which vest on January 1, 2018. These grants were components of 2016 equity compensation.

 

On January 9, 2015, the Board of Directors approved the 2015 Board Compensation Plan, effective immediately, where each director receives a quarterly compensation of $5,000. There were no changes made to the Board compensation during 2016.

 

On August 11, 2016, the Board of PositiveID agreed to exchange 2,025 shares of its Series I Preferred, which have a stated value of $2,025,000 and redemption value of $2,261,800 for 2,262 shares of Series II Preferred, which have a stated value of $2,262,000. The Series II have an aggregate stated value equivalent to the redemption value of the Series I at the exchange date. Pursuant to the Exchange each existing holder of Series I Preferred exchanged their Series I Preferred shares for Series II Preferred shares having equivalent per share stated value, maintaining the same voting rights as they had as holders of the Series I Preferred. The total Series I Preferred Stock, owned by the independent board of directors that were exchanged to Series II Preferred Stock on August 11, 2016 is detailed as follows:

 

        Preferred Series I     Preferred Series II  
Name   Position   Shares
Issued
    Common
Shares
Issuable
Upon
Conversion
    Total
Votes
    Shares
Issued
    Common
Shares
Issuable
Upon
Conversion
    Total
Votes
 
Michael E. Krawitz   Director     151       1,712,993       42,824,823       169       1,712,993       42,824,823  
Jeffrey S. Cobb   Director     138       1,558,948       38,973,711       154       1,558,948       38,973,711  
Ned L. Siegel   Director     114       1,274,550       31,863,751       126       1,274,550       31,863,751  
Total         403       4,546,491       113,662,285       449       4,546,491       113,662,285  

 

As a result of the Exchange, there were nil and 449 shares of Series I and Series II Preferred shares, respectively, issued to the independent Board of Directors as of December 31, 2016.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management

 

The following table sets forth certain information known to us regarding beneficial ownership of shares of our common stock as of March 22, 2017 by:

 

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

 

37  
 

 

Beneficial ownership is determined in accordance with the rules and regulations of the SEC and includes voting and investment power with respect to the securities. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of March 22, 2017 are deemed outstanding. Such shares, however, are not deemed outstanding for purposes of computing the percentage ownership of any other person. To our knowledge, except as indicated in the footnotes to this table and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of our common stock shown opposite such person’s name. The percentage of beneficial ownership is based on 6,039,899,380 shares of our common stock outstanding as of March 22, 2017. Unless otherwise noted below, the address of the persons and entities listed in the table is c/o PositiveID Corporation, 1690 South Congress Avenue, Suite 201, Delray Beach, Florida 33445. As a result, the Company’s issuance of 1,982 shares of Series II Preferred Stock to named executive officers and directors, they have the voting rights to 256,900,028,228 votes as the result of their Series II holdings. The percentage of voting rights in the table below assumes that all Series II shares held by directors and named officers are voted in any instance requiring shareholder vote.

 

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

 

Name and Address of Beneficial Owner   Number of Shares
Beneficially
Owned (#)
    Percent of
Outstanding
Shares (%)
    Percent of Voting
Rights (%)
 
Five Percent Stockholders:                        
William J. Caragol (1)     5,579,806,148       31.4 %     46.6 %
Lyle L. Probst (2)     2,365,865,702       13.3 %     19.8 %
Dominion Capital LLC (3)     603,385,948       9.9 %     * %
Union Capital, LLC (4)     603,385,948       9.9 %     * %
Michael E. Krawitz (5)     878,200,177       4.9 %     7.3 %
Jeffrey S. Cobb (6)     799,231,604       4.5 %     6.7 %
Ned L. Siegel (7)     653,442,382       3.7 %     5.5 %
Named Executive Officers and Directors:                        
William J. Caragol (1)     5,579,806,148       31.4 %     46.6 %
Lyle L. Probst (2)     2,365,865,702       13.3 %     19.8 %
Michael E. Krawitz (5)     878,200,177       4.9 %     7.3 %
Jeffrey S. Cobb (6)     799,231,604       4.5 %     6.7 %
Ned L. Siegel (7)     653,442,382       3.7 %     5.5 %
Executive Officers and Directors as a group (5 persons) (8)     10,276,365,553       57.8 %     85.9 %

*Less than 1%

 

(1)

Mr. Caragol beneficially owns 5,579,806,148 shares which include 44,668 shares of common stock and 170,000 options directly owned by Mr. Caragol. Mr. Caragol has sole voting power over 44,668 shares of our common stock. Mr. Caragol has sole dispositive power over 7,890 shares of our common stock. Mr. Caragol lacks dispositive power over 36,778 shares which are restricted as to transfer until January 1, 2018. Mr. Caragol owns 1,077 shares of Series II Preferred, which may convert to 5,579,591,480 shares of common stock. The Series II Preferred vests on January 1, 2019. On January 7, 2016, Mr. Caragol was granted 500,000 stock options, which vest: (i) 170,000 on January 1, 2017; (ii) 165,000 on January 1, 2018; (iii) 165,000 on January 1, 2019. Only the vested options are included in the table above.

   
(2)

Includes 12,226 shares of our common stock and 102,500 shares of our common stock issuable upon the exercise of stock options that are currently exercisable or exercisable within 60 days of March 22, 2017. Mr. Probst lacks dispositive power over 12,226 shares, which are restricted until January 1, 2018. Mr. Probst owns 456 shares of Series II Preferred, which may convert to 2,365,750,975 shares of common stock. The Series II Preferred vests on January 1, 2019. On January 7, 2016, Mr. Probst was granted 300,000 stock options, which vest: (i) 102,000 on January 1, 2017; (ii) 99,000 on January 1, 2018; (iii) 99,000 on January 1, 2019. Only the vested options are included in the table above.

   
(3)

Dominion Capital LLC (“Dominion”), and Dominion’s managing members Mikhail Gurevich and Daniel Kordash, may be deemed to beneficially own shares of common stock beneficially owned by Dominion, including shares issuable to Dominion upon conversion of a series of convertible notes. The address of the principal business office of Dominion is 3 Fraser Lane, Westport, Connecticut 06880. Voting and dispositive power with respect to the shares owned by Dominion is exercised by Messrs. Gurevich and Kordash. Each of Dominion and Messrs. Gurevich and Kordash disclaims beneficial ownership or control of any of the securities listed above as control may be deemed to be held by the other members of Dominion. However, by reason of the provisions of Rule 13d-3 of the Exchange Act, as amended, Dominion or Messrs. Gurevich and Kordash may be deemed to beneficially own or control the shares owned by Dominion.

 

38  
 

 

(4)

Union Capital, LLC (“Union”), and Union’s managing member Yakov Borenstein, may be deemed to beneficially own shares of common stock beneficially owned by Union, including shares issuable to Union upon conversion of a series of convertible notes. The address of the principal business office of Union is 525 Norton Parkway, New Haven, CT 06511. Voting and dispositive power with respect to the shares owned by Union is exercised by Mr. Borenstein. Each of Union and Mr. Borenstein disclaims beneficial ownership or control of any of the securities listed above as control may be deemed to be held by the other members of Union. However, by reason of the provisions of Rule 13d-3 of the Exchange Act, as amended, Union and Mr. Borenstein may be deemed to beneficially own or control the shares owned by Union.

   
(5)

Includes 12,456 shares of our common stock and 61,400 shares of our common stock issuable upon the exercise of stock options that are currently exercisable or exercisable within 60 days of March 22, 2017. Mr. Krawitz lacks dispositive power over 2,000 shares, which are restricted until January 1, 2018. Mr. Krawitz owns 169 shares of Series II Preferred, which may convert to 878,126,681 shares of common stock. The Series II Preferred vests on January 1, 2019.

   
(6)

Includes 11,496 shares of our common stock and 60,815 shares of our common stock issuable upon the exercise of stock options that are currently exercisable or exercisable within 60 days of March 22, 2017. Mr. Cobb lacks dispositive power over 1,200 shares, which are restricted until January 1, 2018. Mr. Cobb owns 154 shares of Series II Preferred, which may convert to 799,159,293 shares of common stock. The Series II Preferred vests on January 1, 2019.

   
(7)

Includes 12,622 shares of our common stock and 60,800 shares of our common stock issuable upon the exercise of stock options that are currently exercisable or exercisable within 60 days of March 22, 2017. Mr. Siegel lacks dispositive power over 2,400 shares, which are restricted until January 1, 2018. Mr. Siegel owns 126 shares of Series II Preferred, which may convert to 653,368,961 shares of common stock. The Series II Preferred vests on January 1, 2019.

   
(8)

Includes shares of our common stock beneficially owned by current executive officers and directors and shares issuable upon the exercise of stock options that are currently exercisable or exercisable within 60 days of March 22, 2017, in each case as set forth in the footnotes to this table.

 

Equity Compensation Plan Information

 

The following table presents information regarding options and rights outstanding under equity our compensation plans as of December 31, 2016:

 

Plan Category(1)   (a)
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
    (b)
Weighted-
average
exercise price
per share of
outstanding
options,
warrants and
rights
    (c)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column(a))
 
                   
Equity compensation plans approved by security holders     8,086     $ 375.53       1,522,818  
Equity compensation plans not approved by security holders(2)     3,611,800     $ 0.39        
Total     3,619,886     $ 1.23       1,522,818  

 

(1) A narrative description of the material terms of our equity compensation plans is set forth in Note 9 to our consolidated financial statements for the year ended December 31, 2016.
   
(2) We have made grants outside of our equity plans and have 2,692,800 outstanding warrants exercisable for shares of our common stock. These warrants were granted as compensation for financing transactions or for the rendering of consulting services.

 

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

 

Since the beginning of our fiscal year 2016, there has not been, and there is not currently proposed any transaction or series of similar transactions in which the amount involved exceeded or will exceed the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years and in which any related person, including any director, executive officer, holder of more than 5% of our capital stock during such period, or entities affiliated with them, had a material interest, other than as described in the transactions set forth below.

 

39  
 

 

Former Related Party Transactions

 

Sale of VeriChip Business to Former Related Party

 

Throughout the course of 2012 through 2014, the Company and VeriTeQ, a business run by a former related party(CEO of the Company through 2011), entered into a number of agreements for the intellectual property related to the Company’s embedded biosensor portfolio, which ultimately resulted in a GlucoChip and Settlement Agreement, entered into on October 20, 2014 (the “GlucoChip Agreement”), under which the final element of the Company’s implantable microchip business was transferred to VeriTeQ.

 

Pursuant to the VeriTeQ agreements, the Company holds a Note that was received as payment for shared services payments that the Company made on behalf of VeriTeQ during 2011 and 2012 which Note had an original value of $222,115. The note has been fully reserved in all periods presented. The Company also holds a five-year warrant dated November 13, 2013, with original terms entitling the Company to purchase 300,000 shares of VeriTeQ common stock at a price of $2.84. Pursuant to the terms of the warrant, in particular the full quantity and pricing reset provisions, the warrant had an original dollar value of $852,000 and can be exercised using a cashless exercise feature.

 

On October 20, 2014, the Company entered into the GlucoChip Agreement with VeriTeQ to transfer the intellectual property related to its GlucoChip development and to provide financial support to VeriTeQ, for a period of up to two years, in the form of convertible promissory notes. VeriTeQ issued the Company Convertible Promissory Notes in total principal amount of $200,000, and agreed to provide VeriTeQ with continuing financial support through the issuance of additional convertible promissory notes up to an additional amount of $205,000. As of December 31, 2016, the Company had issued Notes with a principal value of $200,000 under the GlucoChip Agreement. As VeriTeQ is in default of its agreements with the Company, there is no intention to provide any additional notes until such time as all defaults are cured.

 

On October 19, 2015, VeriTeQ received a default notice from its senior lender and a Notice of Disposition of Collateral advising the Company that the senior lender, acting as collateral agent, intended to sell the assets at auction, which it did on November 4, 2015. On November 25, 2015, VeriTeQ entered into a stock purchase agreement with an unaffiliated company whereby VeriTeQ agreed to acquire all of the issued and outstanding membership interests of that company, and on May 6, 2016, VeriTeQ completed the closing of that agreement.

 

Pursuant to the cashless exercise feature of the VeriTeQ warrant, and subsequent sale of the underlying shares, the Company realized $335,600 of income which was recorded under other income in the consolidated Statement of Operations during the year ended December 31, 2015. As VeriTeQ is an early stage company, not yet fully capitalized, the Company plans to continue to fully reserve all note receivable and warrant balances. If and when proceeds are realized in the future, gains will be recognized. As of December 31, 2016, the Company had outstanding convertible notes receivable from VeriTeQ of $422,115 and is also owed default principal and interest of which a full reserve has been established as noted above.

 

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

 

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

 

Subject to the Plan, $590,000 of accrued compensation was settled through the commitment to transfer 327,778 shares of VeriTeQ common stock (out of the 1,199,532 total shares of VeriTeQ common stock that are issuable to the Company upon the conversion of VeriTeQ’s Series C convertible preferred stock owned by the Company). The Series C conversion was completed on October 22, 2013. The VeriTeQ shares were valued at $1.80 (adjusted to reflect the 1 for 30 reverse split by VeriTeQ on October 22, 2013), which was a 21% discount to the closing bid price on September 30, 2013, to reflect liquidity discount and holding period restrictions. The closing bid price on the day of conversion was $2.28; on September 30, 2014, one year after the transaction the closing bid price of VeriTeQ’s common stock was $0.0068. Following a 1 for 1,000 reverse stock split of VeriTeQ’s common stock on February 11, 2015 and a 1 for 10,000 reverse stock split on July 29, 2015, the closing bid price of VeriTeQ’s common stock on December 31, 2016 was $0.07.

 

Six members of Management participated in this conversion, including all four members of the Company’s current board of directors, one of its former directors (Barry Edelstein, who resigned from our Board on July 8, 2013 to join VeriTeQ’s Board), and our current SVP of Corporate Development.

 

Subject to the Plan 413 shares of Series I Preferred Stock were issued in settlement of $413,000 of accrued compensation. The conversion price of the Series I shares was fixed at $1.8, which was the closing bid price on the day of conversion. The Series I preferred shares were issued to six members of the Company’s Management, including all four members of the current board of directors and our current President (Lyle Probst) and SVP of Corporate Development (Allison Tomek).

 

40  
 

 

The Board and management did not wish to receive any discount for the conversion of $413,000 of liabilities, but did seek to have a voting preference that was commensurate with the risk and more importantly continued commitment of the Board and management to the Company. The shares were therefore issued at the closing bid price the day of issuance (subject to signed exchange agreements with each participant), and at a dollar for dollar exchange ($1,000 of liability settled for 1 preferred share).

 

Additionally, on December 31, 2013 the three independent directors were each granted 25 shares of Series I Preferred Stock, as a component of their 2014 board compensation. On January 14, 2014, an additional 512 shares of Series I Preferred Stock were issued to the Company’s CEO, President and Senior Vice President. On January 12, 2015, 625 shares of Series I were issued to management and board members for 2014 incentive compensation and 2015 director compensation. On December 22, 2015, an additional 400 shares of Series I were issued to management and board members for 2015 incentive compensation and 2016 director compensation. All Series I shares granted were to vest on January 1, 2018.

 

On July 25, 2016, the Board authorized a Certificate of Designations of Preferences, Rights and Limitations of Series II Convertible Preferred Stock. The Certificate was filed with the State of Delaware Secretary of State on July 25, 2016. The Series II Preferred ranks: (a) senior with respect to dividends and right of liquidation with the common stock; (b) pari passu with respect to dividends and right of liquidation with the Corporation’s Series I Preferred and Series J Convertible Preferred Stock; and (c) junior to all existing and future indebtedness of the Company. The Series II Preferred has a stated value per share of $1,000, subject to adjustment as provided in the Certificate (the “Stated Value”), and a dividend rate of 6% per annum of the Stated Value. As with the Series I Preferred, the Series II Preferred has 25 votes per common share equivalent. The Series II Preferred is subject to redemption (at Stated Value, plus any accrued, but unpaid dividends (the “Liquidation Value”)) by the Company no later than three years after a Deemed Liquidation Event and at the Company’s option after one year from the issuance date of the Series II Preferred, subject to a ten-day notice (to allow holder conversion). The Series II Preferred is convertible at the option of a holder or if the closing price of the common stock exceeds 400% of the Conversion Price for a period of twenty consecutive trading days, at the option of the Company. Conversion Price means a price per share of the common stock equal to 100% of the lowest daily volume weighted average price of the common stock during the subsequent 12 months following the date the Series II Preferred was issued.

 

On August 11, 2016, the Board of PositiveID agreed exchange 2,025 shares of its Series I Preferred, which have a stated value of $2,025,000 and redemption value of $2,261,800 for 2,262 shares of Series II Preferred, which have a stated value of $2,262,000, held by its directors, officers and management, namely, our CEO, acting CFO and Chairman, William J. Caragol, our President, Lyle L. Probst, and our three non-employee directors, Jeffrey Cobb, Michael Krawitz, and Ned L. Siegel, as well as Allison Tomek, our Senior Vice President of Corporate Development, and Kimothy Smith, our Chief Technology Advisor. The Series II have an aggregate stated value equivalent to the redemption value of the Series I at the exchange date. Pursuant to the Exchange each existing holder of Series I Preferred exchanged their Series I Preferred shares for Series II Preferred shares having equivalent per share stated value, maintaining the same voting rights as they had as holders of the Series I Preferred. Both the Series I Preferred and the Series II Preferred have a stated value per share of $1,000, and a dividend rate of 6% per annum. All shares of Series I Preferred previously issued have become null and void and any and all rights arising thereunder have been extinguished. The Series II Preferred is only forfeitable after the exchange date up to January 1, 2019 upon termination for cause and is, subject to acceleration in the event of conversion, redemption and certain events. The total Series I Preferred shares exchanged for Series II Preferred shares on August 11, 2016 is detailed as follows:

 

        Preferred Series I     Preferred Series II  
Name   Position   Shares
Issued
    Common
Shares
Issuable
Upon
Conversion
    Total
Votes
    Shares
Issued
    Common
Shares
Issuable
Upon
Conversion
    Total
Votes
 
William J. Caragol   Chairman and Chief Executive Officer     956       10,884,308       272,107,685       1,077       10,884,308       272,107,685  
Michael E. Krawitz   Director     151       1,712,993       42,824,823       169       1,712,993       42,824,823  
Jeffrey S. Cobb   Director     138       1,558,948       38,973,711       154       1,558,948       38,973,711  
Ned L. Siegel   Director     114       1,274,550       31,863,751       126       1,274,550       31,863,751  
Lyle Probst   President     415       4,614,955       115,373,862       456       4,614,955       115,373,862  
Allison F. Tomek   SVP of Corporate Development     151       1,677,563       41,939,080       166       1,677,563       41,939,080  
Kimothy Smith   Chief Technology Advisor     50       553,761       13,844,034       55       553,761       13,844,034  
Caragol Family Irrevocable Trust         50       592,487       14,812,184       59       592,487       14,812,184  
Total         2,025       22,869,565       571,739,130       2,262       22,869,565       571,739,130  

 

41  
 

 

As a result of the exchange, there were nil and 2,262 shares of Series I and Series II Preferred Stock, respectively, issued and outstanding as of December 31, 2016.

 

As of March 22, 2017, per the table under the heading “Security Ownership of Certain Beneficial Owners and Management”, discussed above, the Company’s named executive officers and directors had aggregate control of 85.9% of the Company’s voting shares out of which Mr. Caragol had control of 46.6% of the Company’s voting shares. our officers, directors and management (in addition to the five people who make up the Majority Stockholders, this includes Allison Tomek, our Senior Vice President of Corporate Development, and Kimothy Smith, our Chief Technology Advisor) have an aggregate of 292,670,729,287 votes on any matter brought to a vote of the holders of our common stock, including an aggregate of 293,089,001,370 votes, or 98% of the total vote, through the ownership of Series II Preferred Stock, and 99,467 votes through the ownership of shares of our common stock. As a result, our named officers, directors, and management have voting control over the 299,128,900,750 of the outstanding voting shares of the Company.

 

Review, Approval or Ratification of Transactions with Related Parties

 

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

 

Director Independence

 

Our Board of Directors currently consists of four members: William J. Caragol, Jeffrey S. Cobb, Michael E. Krawitz and Ned L. Siegel. Although we are not listed on the Nasdaq Capital Market, our Board has determined that three of our four directors, Messrs. Cobb, Krawitz and Siegel, are independent under the standards of the Nasdaq Capital Market. Mr. Caragol, who is our CEO and acting CFO is not considered independent.

 

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

 

Item 14. Principal Accountant Fees and Services

 

For the fiscal years ended December 31, 2016 and 2015, fees for audit and audit related services were as follows:

 

    2016 (1)     2015 (2)  
             
Audit Fees   $ 105,000     $ 92,000  
Audit Related Fees     5,000       86,000  
All Other Fees            
Total Fees   $ 110,000     $ 178,000  

 

(1) Audit related fees for 2016 include review of registration statements and other SEC filings. Audit fees for 2016 relate to the 2016 fiscal year-end audit and review of the interim financial statements conducted by Salberg and Company P.A.
   
(2) In 2015 accountant fees were paid to Salberg and Company P.A. which include: (i) Audit Fees related to the 2015 fiscal year-end audit and the review of interim financial statements, (ii) Audit related fees for the 2013 and 2014 acquisition audits and 2015 interim reviews of the financial statements of both Thermomedics, Inc and E-N-G Mobile Systems, Inc.

 

42  
 

 

Pre-Approval Policies and Procedures

 

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

 

All services provided by and all fees paid to Salberg & Company, P.A. in fiscal 2016 and 2015 were pre-approved by our audit committee, in accordance with its policy. None of the services described above were approved pursuant to the exception provided in Rule 2-01(c)(7)(i)(C) of Regulations S-X promulgated by the SEC.

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules

 

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

 

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

 

43  
 

 

SIGNATURES

 

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

 

  POSITIVEID CORPORATION
     
Date: March 31, 2017 By: /s/ William J. Caragol
    William J. Caragol
    Chief Executive Officer and Acting Chief Financial Officer

 

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

 

Signature   Title   Date
         
/s/ William J. Caragol   Chief Executive Officer, Chairman of the   March 31, 2017
William J. Caragol   Board and Acting Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)    
         
/s/ Jeffrey S. Cobb   Director   March 31, 2017
Jeffrey S. Cobb        
         
/s/ Michael E. Krawitz   Director   March 31, 2017
Michael E. Krawitz        
         
/s/ Ned L. Siegel   Director   March 31, 2017
Ned L. Siegel        

 

44  
 

 

PositiveID Corporation and Subsidiaries

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm F-2
 
Consolidated Balance Sheets as of December 31, 2016 and 2015 F-3
 
Consolidated Statements of Operations for the years ended December 31, 2016 and 2015 F-4
 
Consolidated Statements of Changes in Stockholders’ Deficit for the years ended December 31, 2016 and 2015 F-5
 
Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015 F-6
 
Notes to Consolidated Financial Statements F-7

 

45  
 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of:

PositiveID Corporation

 

We have audited the accompanying consolidated balance sheets of PositiveID Corporation and its Subsidiaries as of December 31, 2016 and 2015 and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for each of the two years in the period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

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

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PositiveID Corporation and its Subsidiaries as of December 31, 2016 and 2015 and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company reported a net loss, and used cash for operating activities of approximately $13,061,000 and $3,649,000 respectively, in 2016. At December 31, 2016, the Company had a working capital deficit, stockholders’ deficit and accumulated deficit of approximately $10,285,000, $8,863,000 and $157,222,000, respectively. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans as to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Salberg & Company, P.A.

 

SALBERG & COMPANY, P.A.

Boca Raton, Florida

March 31, 2017

 

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

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

www.salbergco.com • info@salbergco.com

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

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

 

F- 2  
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data)

 

    As of December 31,  
    2016     2015  
Assets                
Current Assets:                
Cash   $ 40     $ 173  
Accounts receivable     307       641  
Inventories, net     678       1,768  
Other receivables     -       123  
Prepaid expenses and other current assets     97       243  
Total Current Assets     1,122       2,948  
                 
Equipment, net     129       163  
Goodwill     800       817  
Intangibles, net     492       749  
Other assets     19       18  
Total Assets   $ 2,562     $ 4,695  
                 
Liabilities and Stockholders’ Deficit                
Current Liabilities:                
Accounts payable   $ 394     $ 248  
Accrued expenses and other current liabilities     807       950  
Deferred revenue     353       1,847  
Notes and loans payable, net of discounts     469       359  
Line of credit     150        
Short-term convertible debt and accrued interest, net of discounts and premiums     4,808       2,128  
Embedded conversion option liability     4,284       7,786  
Tax contingency     142       201  
Contingent earn-out liability           123  
Total Current Liabilities     11,407       13,642  
                 
Long Term Liabilities:                
Loan payable     18       31  
Contingent earn-out liability           184  
Mandatorily redeemable preferred stock, 2,500 shares authorized; $0.001 par value; Series I Preferred – nil and 2,025 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively; liquidation preference and redemption value of nil and $2,196 at December 31, 2016 and December 31, 2015, respectively.           2,680  
Total Liabilities     11,425       16,537  
                 
Commitments and contingencies (Note 11)                
                 
Stockholders’ Deficit:                
Preferred stock, 5,000,000 shares authorized, $0.001 par value:                
Convertible preferred stock, 5,000,000 shares authorized, $0.001 par value; Series J Convertible Preferred -71 and 125 shares issued and outstanding at December 31, 2016 and 2015, respectively (liquidation preference of $71,000 and $125,000, at December 31, 2016 and 2015, respectively)            
Series II Convertible Preferred – 2,262 and 0 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively; (liquidation preference of $2,315,293 and nil, at  December 31, 2016 and December 31, 2015, respectively)            
Common stock, 19,995,000,000 shares authorized, $0.0001 par value; 2,684,727,704 and 8,815,825 shares issued and outstanding at December 31, 2016 and 2015, respectively     269       1  
Additional paid-in capital     148,090       132,318  
Accumulated deficit     (157,222 )     (144,161 )
Total Stockholders’ Deficit     (8,863 )     (11,842 )
Total Liabilities and Stockholders’ Deficit   $ 2,562     $ 4,695  

 

See accompanying notes to consolidated financial statements.

 

F- 3  
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except share and per share data)

 

    Year Ended December 31,  
    2016     2015  
             
Revenues   $ 5,559     $ 2,940  
                 
Cost of revenues     3,537       335  
                 
Gross profit     2,022       2,605  
                 
Operating expenses:                
Selling, general and administrative (including $2,025 in the year ended December 31, 2016 reflecting a non-cash charge for the exchange of Series II Preferred Stock for Series I Preferred Stock – see Note 9)     8,729       5,611  
Research and development     440       1,420  
Total operating expenses     9,169       7,031  
                 
Operating loss     (7,147 )     (4,426 )
                 
Other income (expense):                
Interest expense     (7,652 )     (4,719 )
Change in acquisition obligations, net     107        
Change in fair value of embedded conversion option liability     1,601       (2,427 )
Loss on extinguishment of debt     (32 )     (233 )
Other income     62       401  
Total other expense, net     (5,914 )     (6,978 )
                 
Net loss before income tax provision     (13,061 )     (11,404 )
                 
Income tax expense            
Net loss     (13,061 )     (11,404 )
                 
Preferred stock dividends     (155 )     (106 )
Net loss attributable to common stockholders   $ (13,216 )   $ (11,510 )
                 
Net loss per common share attributable to common stockholders – basic and diluted   $ (0.06 )   $ (1.88 )
Weighted average shares outstanding – basic and diluted     236,667,178       6,124,901  

 

See accompanying notes to consolidated financial statements.

 

F- 4  
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Deficit

For the Years Ended December 31, 2016 and 2015

(In thousands, except share data)

 

    Preferred Shares     Common Shares     Additional Paid-in     Accumulated     Total Stockholders’  
    Shares     Amount     Shares     Amount     Capital     Deficit     Deficit  
Balance at December 31, 2014         $       3,390,655     $     $ 124,311     $ (132,757 )   $ (8,446 )
                                                         
Net loss, 2015                                   (11,404 )     (11,404 )
Common Stock issued for services                 246,000             1,024             1,024  
Issuance of Series J Preferred shares     125                         125             125  
Common Stock issued pursuant to convertible note conversions                 5,179,170       1       3,420             3,421  
Reclassification of premium upon debt conversion and redemption                             421             421  
Reclassification of derivative liability upon debt conversion                             3,123             3,123  
Preferred stock dividends                             (106 )           (106 )
Balance at December 31, 2015     125     $       8,815,825     $ 1     $ 132,318     $ (144,161 )   $ (11,842 )
                                                         
Net loss, 2016                                   (13,061 )     (13,061 )
Common Stock issued for services - third parties                 728,700             169             169  
Vested shares returned                 (1,316 )                        
Other Stock based compensation - employees                             964             964  
Common Stock issued pursuant to convertible note conversions                 2,675,184,495       268       5,061             5,329  
Reclassification of derivative liability upon debt conversion                             4,676             4,676  
Reclassification of premium upon debt conversion and redemption                             305             305  
Retired Series J Preferred shares     (54 )                       (54 )           (54 )
Issuance of Series II Preferred shares     2,262                         4,806             4,806  
Preferred stock dividends                             (155 )           (155 )
Balance at December 31, 2016     2,333     $       2,684,727,704     $ 269     $ 148,090     $ (157,222 )   $ (8,863 )

 

See accompanying notes to consolidated financial statements.

 

F- 5  
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

 

    Year Ended December 31,  
    2016     2015  
Cash flows from operating activities:                
Net loss   $ (13,061 )   $ (11,404 )
                 
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     300       258  
Stock-based compensation     3,158       2,259  
Allowance on note receivable           140  
Loss on extinguishment of debt     32       233  
Convertible debt discounts and premium amortization     6,903       4,089  
Gain on sale of investment shares           (336 )
Note issued as consideration for services     145       150  
Change in fair value of embedded conversion option liability     (1,601 )     2,427  
Change in acquisition obligations, net     (107 )      
Changes in operating assets and liabilities:                
(Increase) decrease in:                
Account receivable     334       (124 )
Prepaid expenses and other assets     145       (135 )
Inventory     1,090       128  
Increase (decrease) in:                
Accounts payable, accrued expenses and other current liabilities     (103 )     (125 )
Accrued interest     611       629  
Deferred revenue     (1,495 )     (2,696 )
Net cash used in operating activities     (3,649 )     (4,507 )
Cash flows from investing activities:                
Acquisition of Thermomedics, Inc.           (175 )
Acquisition of E-N-G Mobile Systems, Inc.,net of cash acquired           (667 )
Proceeds from sale of investment shares, net           336  
Loan pursuant to note receivable           (140 )
Purchase of property & equipment     (15 )     (3 )
Net cash used in investing activities     (15 )     (649 )
Cash flows from financing activities:                
Proceeds from convertible debt financing, net of fees     3,750       5,913  
Proceeds from line of credit, net     150        
Principal payments of short-term debt     (369 )     (729 )
Net cash provided by financing activities     3,531       5,184  
                 
Net increase (decrease) in cash     (133 )     28  
                 
Cash, beginning of year     173       145  
Cash, end of year   $ 40     $ 173  
                 
Supplementary Cash Flow Information:                
Cash paid for interest   $ 100     $ 13  
Cash paid for income taxes   $     $  
Non-cash financing and investing activities:                
Conversion of promissory notes into common stock   $ 5,329     $ 3,842  
Reclassification of embedded conversion option liability upon conversion of debt   $ 4,676     $ 3,123  
Reclassification of note premium upon conversion of debt   $ 305     $  
Embedded conversion option liability recorded as debt discount   $ 2,776     $ 6,330  
Capital lease financing   $     $ 47  
Stock issued for prepaid services   $ 156     $ 186  
Promissory note issued for services   $ 145     $ 150  
Preferred stock, notes payable and earn-out liability consideration recorded for business combinations   $ 75     $ 471  

 

See accompanying notes to consolidated financial statements.

 

F- 6  
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2016 and 2015

 

1. Organization

 

PositiveID Corporation, including its wholly-owned subsidiaries PositiveID Diagnostics Inc. (“PDI”), E-N-G Mobile Systems, Inc. (“ENG”), and Thermomedics, Inc. (“Thermomedics”), (collectively, the “Company” or “PositiveID”), develops molecular diagnostic systems for bio-threat detection and rapid medical testing; manufactures specialty technology vehicles; and markets the Caregiver® non-contact clinical thermometer, respectively. The Company’s fully automated pathogen detection systems and assays are designed to detect a range of biological threats. The Company’s M-BAND (Microfluidic Bio-agent Autonomous Networked Detector) system is an airborne bio-threat detection system developed for the homeland defense industry to detect biological weapons of mass destruction. The Company is developing Firefly Dx, an automated pathogen detection system for rapid diagnostics, both for clinical and point-of-need applications. The Company also manufactures specialty technology vehicles focused primarily on mobile laboratory and communications applications. The Company’s Caregiver® thermometer is an FDA-cleared infrared thermometer for the professional healthcare market.

 

Authorized Common Stock and Reverse Stock Split

 

As of December 31, 2016, the Company was authorized to issue 3.895 billion shares of common stock (see below for additional increase). On February 25, 2016, the Company filed the Seventh Amendment to the Second Amended and Restated Certificate of Incorporation, as amended, with the State of Delaware to increase the number of authorized common shares to 3.895 billion shares, from 1.97 billion shares. On June 27, 2016, the Company’s Board of Directors approved a reverse stock split in the ratio of 1-for-50 and the Company filed the Eighth Certificate of Amendment to its Second Amended and Restated Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware to affect the reverse stock split, effective July 5, 2016. The reverse split only affected outstanding common stock and the number of authorized shares was not adjusted. All share amounts in our historical consolidated financial statements have been adjusted to reflect the 1-for-50 reverse stock split.

 

On November 30, 2016, the Company filed its Third Amended and Restated Certificate of Incorporation with the State of Delaware, to permit stockholders to act by written consent, and to permit stockholders of different classes of the Company’s capital stock to vote as a single class with regard to certain changes to the Company’s certificate of incorporation. The Third Amended and Restated Certificate of Incorporation filed also changed in the par value of the Company’s common stock from $0.01 to $0.001.

 

On January 30, 2017, the Company filed the First Amendment to the Company’s Third Amended and Restated Certificate of Incorporation with the State of Delaware, to increase the Company’s authorized capital stock from 3.9 billion shares to 20 billion shares (19.995 billion common) and to change the par value of the Company’s common stock from $0.001 to $0.0001. All dollar values in the accompanying historical consolidated financial statements have been adjusted to reflect the change in the par value of the common stock.

 

Going Concern

 

The Company’s consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of December 31, 2016, we had a working capital deficit, stockholders’ deficit and accumulated deficit of approximately $10.3 million, $8.9 million and $157.2 million, respectively. Net loss and net cash used in operations was $13.1 million, and $3.6 million, respectively, in 2016 compared to a working capital deficit of approximately $10.7 million, a stockholders’ deficit of approximately $11.8 million and an accumulated deficit of approximately $144.2 million of December 31, 2015. The change in the working capital deficit was primarily due to operating losses for the period and capital raised through convertible debt financings.

 

We have incurred operating losses and net cash used in operating activities since the merger that created PositiveID. The current 2016 operating losses are the result of research and development expenditures, selling, general and administrative expenses related to our molecular diagnostics and detection and Caregiver products. We expect our operating losses to continue through 2017. It’s management’s opinion that these conditions raise substantial doubt about our ability to continue as a going concern.

 

Our ability to continue as a going concern is dependent upon our ability to obtain financing to fund the continued development of our products and to support working capital requirements. Until we are able to achieve operating profits, we will continue to seek to access the capital markets. In 2015 and 2016, we raised approximately $5.9 and $3.8 million, respectively from the issuance of convertible debt and debentures.

 

The Company intends to continue to access capital to provide funds to meet its working capital requirements for the near-term future. In addition, and if necessary, the Company could reduce and/or delay certain discretionary research, development and related activities and costs. However, there can be no assurances that the Company will be able to negotiate additional sources of equity or credit for its long-term capital needs. The Company’s inability to have continuous access to such financing at reasonable costs could materially and adversely impact its financial condition, results of operations and cash flows, and result in significant dilution to the Company’s existing stockholders. The Company’s consolidated financial statements do not include any adjustments relating to recoverability of assets and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

 

F- 7  
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2016 and 2015

 

2. Summary of Significant Accounting Policies

 

Principles of Consolidations

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries of which all are inactive except for PDI, Thermomedics and ENG. All intercompany balances and transactions have been eliminated in the consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates during the reported periods include valuation of assets acquired and liabilities assumed in business combinations, allowance for doubtful accounts receivable, inventories valuation, valuation of goodwill and intangible assets, valuation of loss and other contingencies, product warranty liabilities, valuation of derivatives, valuation of beneficial conversion features, estimate of contingent earn-out liabilities, valuation of stock-based compensation and an estimate of the deferred tax asset valuation allowance.

 

Cash and Cash Equivalents

 

For the purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at December 31, 2016 and 2015, respectively. The Company maintained its cash in various financial institutions during the years ended December 31, 2016 and 2015. Balances were insured up to Federal Deposit Insurance Corporation (“FDIC”) limits. At times, cash deposits exceeded the federally insured limits. There were no cash deposits that exceeded the federally insured limits as of December 31, 2016.

 

Accounts receivable

 

Accounts receivable are stated at their estimated net realizable value. The Company reviews its accounts to estimate losses resulting from the inability of its customers to make required payments. Any required allowance is based on specific analysis of past due accounts and also considers historical trends of write-offs. Past due status is based on how recently payments have been received from customers. The Company’s collection experience has been favorable reflecting a limited number of customers. No allowance was deemed necessary at December 31, 2016 and 2015.

 

Inventories

 

Inventory consists of finished goods of our Caregiver® non-contact thermometers, and in our Mobile Lab Segment consists of finished goods, standard and manufactured frames and bodies of vehicles, components of mobile units and other materials and is stated at lower of cost and net realizable value on average basis (see Note 3). The Company early adopted ASU 2015-11 “Simplifying the Measurement of Inventory” on January 1, 2016, and there was no material impact. Reserves, if necessary, are recorded to reduce inventory to net realizable value based on assumptions about consumer demand, current inventory levels and product life cycles for the various inventory items. These assumptions are evaluated periodically and are based on the Company’s business plan and from feedback from customers and the product development team; however, estimates can vary significantly. As of December 31, 2016 and 2015, inventory reserves were not material.

 

Reserves for Warranty

 

The Company records a reserve at the time product revenue is recorded based on historical rates. The reserve is reviewed during the year and is adjusted, if appropriate, to reflect new product offerings or changes in experience. Actual warranty claims are tracked by product line. The warranty reserve was $17,000 as of December 31, 2016 and is included in accrued expenses and other liabilities.

 

Equipment

 

Equipment is carried at cost less accumulated depreciation, computed using the straight-line method over the estimated useful lives. Leasehold improvements are depreciated over the shorter of the lease term or useful life, software is depreciated over 5 years, and equipment is depreciated over periods ranging from 1 to 8 years. Repairs and maintenance which do not extend the useful life of the asset are charged to expense as incurred. Gains and losses on sales and retirements are reflected in the consolidated statements of operations. Depreciation expense for 2016 and 2015 was $42,000 and $4,403, respectively.

 

F- 8  
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2016 and 2015

 

Equipment consists of the following (in thousands):

 

        December 31,  
    Est. Useful Lives   2016     2015  
Furniture and equipment   3-5 years   $ 62     $ 83  
Machinery and equipment   1-8 years     71       59  
Autos   3 -5 years     35       35  
Leasehold improvements   1-3 years     7       14  
Total equipment         175       191  
Less accumulated depreciation         (46 )     (28 )
                     
Property and Equipment, Net       $ 129     $ 163  

 

Intangible Assets and Goodwill

 

Intangible assets are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful lives. Customer contracts and relationships are being amortized over a period of 3 years, patents and other intellectual property are being amortized over a period of 5 years, and non-compete agreements are being amortized over 2 years (see Note 5).

 

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

 

The Company records goodwill as the excess of the purchase price over the fair values assigned to the net assets acquired in business combinations. Goodwill is allocated to reporting units as of the acquisition date for the purpose of goodwill impairment testing. The Company’s reporting units are those businesses for which discrete financial information is prepared. ASC 350, “Intangibles — Goodwill and Other” requires that intangible assets with indefinite lives, including goodwill, be evaluated on an annual basis for impairment or more frequently if an event occurs or circumstances change that could potentially result in impairment. The goodwill impairment test requires the allocation of goodwill and all other assets and liabilities to reporting units. If the fair value of the reporting unit is less than the book value (including goodwill), then goodwill is reduced to its implied fair value and the amount of the write-down is charged to operations. We are required to test our goodwill and intangible assets with indefinite lives for impairment at least annually.

 

Revenue Recognition

 

Revenue is recognized when persuasive evidence of an arrangement exists, collectability of arrangement consideration is reasonably assured, the arrangement fees are fixed or determinable and upon completion and delivery in accordance with the customer contract or purchase order.

 

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

 

To date, the Company has generated revenue from three sources: (1) professional services, (2) technology licensing, and (3) product sales.

 

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

 

  (1) Revenues for professional services, which are of short term duration, are recognized when services are provided;
  (2) Technology license revenue is recognized upon the completion of all terms of that license. Payments received in advance of completion of the license terms are recorded as deferred revenue; and
  (3) Revenue from sales of the Company’s products is recorded when risk of loss has passed to the buyer and criteria for revenue recognition discussed above is met. Payments received in advance of delivery and revenue recognition are recorded as deferred revenue.

 

F- 9  
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2016 and 2015

 

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

 

Concentrations

 

Concentration of Deferred Revenue

 

As of December 31, 2016, the Company had deferred revenue of approximately $0.4 million of which 54% and 20% were from two of the Company’s customers. As of December 31, 2015, the Company had deferred revenue of approximately $1.8 million of which 21%, 22% and 38% were from the Company’s three largest customers.

 

Concentration of Revenues

 

During the year ended December 31, 2016, the Company had revenue of approximately $5.6 million of which 26%, 13% and 12% were from three of the Company’s customers. During year ended December 31, 2015, the Company had revenue of $2.9 million of which 91% was from one customer.

 

Concentration of Accounts Receivable

 

As of December 31, 2016, the Company had accounts receivable of approximately $0.3 million of which 55% and 14% were from two of the Company’s customers. As of December 31, 2015, the Company had accounts receivable of approximately $0.6 million of which 60% and 19% were from two of the Company’s customers.

 

Advertising Costs

 

Advertising costs are expensed as incurred. Advertising costs for the years ended December 31, 2016 and 2015 were minimal.

 

Shipping and Handling

 

Costs incurred by the Company for freight in and freight out are included in costs of revenue. Freight in and freight out costs incurred for the years ended December 31, 2016 and 2015 were minimal.

 

Legal Expenses

 

All legal costs are charged to expense as incurred.

 

Convertible Notes With Fixed Rate Conversion Options

 

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

 

Accounting for Derivatives

 

The Company evaluates its convertible debt, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for. The result of this accounting treatment is that under certain circumstances the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or expense. Upon conversion or exercise of a convertible note containing an embedded derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity and the note is reclassified to equity without gain or loss. Equity instruments that are initially classified as equity that become subject to reclassification under this accounting standard are reclassified to liability at the fair value of the instrument on the reclassification date.

 

Debt Issue Cost

 

Debt issuance cost paid to lenders, or third parties are recorded as debt discounts and amortized over the life of the underlying debt instrument.

 

F- 10  
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2016 and 2015

 

Fair Value of Financial Instruments and Fair Value Measurements

 

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

 

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

 

  Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
     
  Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
     
  Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

 

Stock-Based Compensation

 

Stock-based compensation expenses are reflected in the Company’s consolidated statements of operations under selling, general and administrative expenses and research and development expenses.

 

The Company estimates the fair value of stock-based compensation awards on the date of grant using the Black-Scholes-Merton (“BSM”) option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and are freely transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The BSM option pricing model considers, among other factors, the expected term of the award and the expected volatility of the Company’s stock price. Expected terms are calculated using the Simplified Method, volatility is determined based on the Company’s historical stock price trends and the discount rate is based upon treasury rates with instruments of similar expected terms. Warrants granted to non-employees are accounted for in accordance with the measurement and recognition criteria of ASC Topic 505-50, Equity Based Payments to Non-Employees.

 

Compensation expense for all stock-based employee and director compensation awards granted is based on the grant date fair value estimated in accordance with the provisions of ASC Topic 718, Stock Compensation (“ASC Topic 718”). The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the vesting term. Vesting terms vary based on the individual grant terms.

 

Income Taxes

 

The Company accounts for income taxes under the asset and liability approach for the financial accounting and reporting of income taxes. Deferred taxes are recorded based upon the tax impact of items affecting financial reporting and tax filings in different periods. A valuation allowance is provided against net deferred tax assets when the Company determines realization is not currently judged to be more likely than not.

 

The Company follows a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition purposes by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Accordingly, the Company reports a liability for unrecognized tax benefits resulting from the uncertain tax positions taken or expected to be taken on a tax return and recognizes interest and penalties, if any, related to uncertain tax positions as interest expense. The Company does not have any uncertain tax positions at December 31, 2016 and 2015.

 

F- 11  
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2016 and 2015

 

Research and Development Costs

 

The principal objective of our research and development program is to develop high-value molecular diagnostic products such as Firefly Dx and M-BAND. We focus our efforts on four main areas: 1) engineering efforts to extend the capabilities of our systems and to develop new systems; 2) assay development efforts to design, optimize and produce specific tests that leverage the systems and chemistry we have developed; 3) target discovery research to identify novel micro RNA targets to be used in the development of future assays; 4) chemistry research to develop innovative and proprietary methods to design and synthesize oligonucleotide primers, probes and dyes to optimize the speed, performance and ease-of-use of our assays. Research and development cost are expensed as incurred. Total research and development expense was $0.4 million and $1.4 million for the years ended December 31, 2016 and 2015, respectively.

 

Segments

 

The Company follows the guidance of ASC 280-10 for “Disclosures about Segments of an Enterprise and Related Information.” During 2015, the Company only operated in one segment – Diagnostics and Detection. Beginning January 1, 2016, the Company operated in three business segments: Molecular Diagnostics, Medical Devices and Mobile Labs (see Note 13).

 

Loss Per Common Share

 

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

 

The following potentially dilutive equity securities outstanding as of December 31, 2016 and 2015 were not included in the computation of dilutive loss per common share because the effect would have been anti-dilutive (in thousands):

 

    December 31,  
    2016     2015  
Common shares issuable under:                
Convertible notes     13,287,432       10,930  
Convertible Series I Preferred Stock           1,796  
Convertible Series II Preferred Stock     3,308,394        
Convertible Series J Preferred Stock     101,429       116  
Stock options     3,620       492  
Warrants     2,693       270  
Unvested restricted common stock     69       67  
      16,703,637       13,671  

 

The Common shares issuable under the convertible notes, convertible Series I, Series II and Series J Preferred Stock was calculated using the closing bid prices at December 31, 2016 and 2015 which were $0.0007 and $0.0215, respectively.

 

Recent Accounting Pronouncements

 

There are no new accounting pronouncements during the year ended December 31, 2016 other than those described below that affect the consolidated financial position of the Company or the results of its operations. Accounting Standard Updates which are not effective until after December 31, 2016, and the potential effects on the Company’s consolidated financial position or results of its’ operations are discussed below.

 

ASU 2017-04:

 

In January 2017, FASB issued Accounting Standards Update (“ASU”), 2017-04 — Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets.

 

F- 12  
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2016 and 2015

 

A public business entity that is an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. This updated guidance is not expected to have a material impact on our results of operations, cash flows or financial condition.

 

ASU 2016-20:

 

In December 2016, FASB issued Accounting Standards Update (“ASU”), 2016-20 — Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments in this Update affect the guidance in Update 2014-09, which is not yet effective. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. This updated guidance is not expected to have a material impact on our results of operations, cash flows or financial condition (see ASU 2016-12 and ASU 2014-09 below).

 

ASU 2016-16:

 

In October 2016, FASB issued Accounting Standards Update (“ASU”), 2016-16 — Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The amendments in this Update eliminate the exception for an intra-entity transfer of an asset other than inventory. Two common examples of assets included in the scope of this Update are intellectual property and property, plant, and equipment. It also aligns the recognition of income tax consequences for intra-entity transfers of assets other than inventory with International Financial Reporting Standards (IFRS). Specifically, IAS 12, Income Taxes, requires recognition of current and deferred income taxes resulting from an intra-entity transfer of any asset (including inventory) when the transfer occurs.

 

For public business entities, the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. For all other entities, the amendments are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual periods beginning after December 15, 2019. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the first interim period if an entity issues interim financial statements. This updated guidance is not expected to have a material impact on our results of operations, cash flows or financial condition.

 

ASU 2016-15:

 

In August 2016, FASB issued Accounting Standards Update (“ASU”), 2016-15 — Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this Update provide guidance on the following eight specific cash flow issues:

 

  1. Debt Prepayment or Debt Extinguishment Costs
  2. Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing
  3. Contingent Consideration Payments Made after a Business Combination
  4. Proceeds from the Settlement of Insurance Claims
  5. Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies
  6. Distributions Received from Equity Method Investees
  7. Beneficial Interests in Securitization Transactions
  8. Separately Identifiable Cash Flows and Application of the Predominance Principle

 

Effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. This updated guidance is not expected to have a material impact on our results of operations, cash flows or financial condition.

 

F- 13  
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2016 and 2015

 

ASU 2016-12:

 

In May 2016, FASB issued Accounting Standards Update (“ASU”), 2016-12— Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606 ) , which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year to December 15, 2017. This updated guidance is not expected to have a material impact on our results of operations, cash flows or financial condition (see ASU 2016-20, 10 and ASU 2014-09 below).

 

ASU 2016-10:

 

In April 2016, FASB issued Accounting Standards Update (“ASU”), 2016-10—Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year to annual reporting periods beginning after December 15, 2017. This updated guidance is not expected to have a material impact on our results of operations, cash flows or financial condition (see ASU 2016-20, 12 above and ASU 2014-09 below).

 

ASU 2016-09:

 

In March 2016, FASB issued Accounting Standards Update (“ASU”), 2016-09— “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities.

 

  Accounting for Income Taxes
  Classification of Excess Tax Benefits on the Statement of Cash Flows
  Forfeitures
  Minimum Statutory Tax Withholding Requirements
  Classification of Employee Taxes Paid on the Statement of Cash Flows When an Employer Withholds Shares for Tax-Withholding Purposes
  Practical Expedient—Expected Term
  Intrinsic Value

 

In addition to those simplifications, the amendments eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. This should not result in a change in practice because the guidance that is being superseded was never effective.

 

For public business entities, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. This updated guidance is not expected to have a material impact on our results of operations, cash flows or financial condition.

 

ASU 2016-02:

 

In February 2016, FASB issued Accounting Standards Update (“ASU”), 2016-02— “Leases (Topic 842), Section A—Leases: Amendments to the FASB Accounting Standards Codification; Section B—Conforming Amendments Related to Leases: Amendments to the FASB Accounting Standards Codification; Section C—Background Information and Basis for Conclusions”. Effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for any of the following:

 

  1. A public business entity
     
  2. A not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market
     
  3. An employee benefit plan that files financial statements with the U.S. Securities and Exchange Commission (SEC).

 

F- 14  
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2016 and 2015

 

For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application of the amendments in this Update is permitted for all entities. This updated guidance is not expected to have a material impact on our results of operations, cash flows or financial condition.

 

ASU 2014-09:

 

In June 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”. The update gives entities a single comprehensive model to use in reporting information about the amount and timing of revenue resulting from contracts to provide goods or services to customers. The proposed ASU, which would apply to any entity that enters into contracts to provide goods or services, would supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, the update would supersede some cost guidance included in Subtopic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts. The update removes inconsistencies and weaknesses in revenue requirements and provides a more robust framework for addressing revenue issues and more useful information to users of financial statements through improved disclosure requirements. In addition, the update improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer (see ASU 2016-20, 12 and 10 above).

 

3. Inventories

 

Inventories consisted of the following (in thousands):

 

    December 31,  
    2016     2015  
Finished goods of non-contact thermometers   $ 28     $ 15  
Materials inventory     462       966  
Mobile vehicle inventory     188       787  
    $ 678     $ 1,768  

 

4. Acquisitions/Dispositions

 

ENG Mobile Systems Acquisition

 

On December 24, 2015, the Company acquired all of the outstanding common stock of E-N-G Mobile Systems, Inc. (“ENG”) from its sole shareholder (the “Seller”). Pursuant to the Purchase Agreement, as consideration at the time of closing of the Acquisition, PositiveID paid the Seller $750,000 in cash and issued a convertible secured promissory note to the Seller in the amount of $150,000. The Company has also entered into a two-year consulting agreement with the Seller. The consulting agreement was determined not to represent additional purchase price.

 

The Purchase Agreement also provided for earn-out payments that could be earned by ENG to the benefit of the Seller. Each Earn-Out Payment, was calculated at 5% of the revenue actually recognized and realized from each of the contracts and purchase orders identified, with an earn-out value indicated for each on the signed backlog schedule (the “Signed Backlog Schedule”) subsequent to Closing. The Earn-Out Payments were subject to adjustment in conjunction with the finalization of the net asset adjustment provided for in the Purchase Agreement. The Company recorded a contingent earn-out liability of approximately $123,000, as a current liability, as reflected in the consolidated balance sheet as of December 31, 2015, and an offsetting recovery asset of approximately $111,000. During the year ended December 31, 2016, the Company and the seller of ENG agreed to the final measurement of the earn-out consideration taking into account the finalization of the net asset balance, with total earnout payments of approximately $39,000. As a result, the Company recorded an additional expense of $27,300 during the year ended December 31, 2016 which is included in change in acquisition obligations in the accompanying consolidated statement of operations. The contingent earn-out liability related to ENG had no balance as of December 31, 2016.

 

The estimated purchase price of the acquisition totaled $912,000, comprised of $750,000 in cash, a convertible seller note of $150,000 (“ENG Note”), and the fair value of the contingent consideration estimated at approximately $123,000, less an estimated recovery based on the closing net worth of ENG estimated at $111,000 at December 31, 2015. The fair value of the contingent consideration was estimated based upon the present value of the expected future payouts of the contingent consideration and was subject to change upon the finalization of the purchase accounting which occurred during the year ended December 31, 2016, as discussed in the paragraph above.

 

F- 15  
 

 

POSITIVEID CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2016 and 2015

 

The ENG note matured on December 31, 2016 and had an outstanding balance of $157,664 on the maturity date. The ENG note was amended on December 31, 2016. Pursuant to the amendment, beginning January 1, 2017 (i) the holder agrees to waive all events of default so long as the Company meets the obligations under this amendment; (ii) the note will accrue 8% interest per annum; (iii) the Company will make monthly payments of $8,000 for the first six months of 2017; (iv) the remaining outstanding principal and interest balance of the note will be paid in a lump sum in the seventh month of 2017, which payment shall be accelerated under certain circumstances as described in the amendment.

 

The Company acquired ENG for a number of reasons including the experience of its workforce, the quality and long history of its product offerings, its prospects for sales and profit growth, and the Company’s ability to leverage its business relationships to create new growth opportunities.

 

In connection with the issuance of the ENG Note, the Company computed a premium of $50,000 as the note is considered a stock settled debt under ASC 480, all of which was amortized immediately as a non-cash expense charged to interest expense. The principal amount and premium are included in short-term convertible debt in the balance sheet as of December 31, 2016.

 

Thermomedics Acquisition

 

On December 4, 2015, the Company entered into several agreements related to its acquisition of all of the outstanding common stock of Thermomedics, Inc. (“Thermomedics”). One of those agreements was a Management Services and Control Agreement, dated December 4, 2015 (the “Control Agreement”), between the Company, Thermomedics, and Sanomedics, Inc. (“Sanomedics”), whereby PositiveID was appointed the manager of Thermomedics. In a separate agreement, the Company entered into a First Amendment to the Stock Purchase Agreement (the “Amendment”) with Sanomedics. The original Stock Purchase Agreement (“Purchase Agreement”) was entered into on October 21, 2015, and defines the agreed upon terms of the Company’s acquisition of all of the common stock of Thermomedics from Sanomedics. As a result of the Company assuming control of Thermomedics on December 4, 2015, it determined, pursuant to ASC 805-10-25-6, that December 4, 2015 was the acquisition date of Thermomedics for accounting purposes.

 

The estimated purchase price of the acquisition totaled $484,000, comprised of $175,000 in cash, Series J preferred stock consideration of $125,000, and the fair value of the contingent consideration estimated at approximately $184,000. The fair value of the contingent consideration was estimated based upon the present value of the expected future payouts of the contingent consideration and is subject to change upon the finalization of the purchase accounting.

 

On December 4, 2015, the Board of Directors authorized and on December 7, 2015, the Company filed with the State of Delaware, a Certificate of Designations of Preferences, Rights and Limitations of Series J Preferred Stock. The Series J Preferred Stock ranks; (a) senior with respect to dividends and right of liquidation with the Company’s common stock (b) pari passu with respect to dividends and right of liquidation with the Company’s Series I Convertible Preferred Stock; and (c) junior with respect to dividends and right of liquidation to all existing and future indebtedness of the Company. Without the prior written consent of Holders holding a majority of the outstanding shares of Series J Preferred Stock, the Company may not issue any Preferred Stock that is senior to the Series J Preferred Stock in right of dividends and liquidation. At any time after the date of the issuance of shares of Series J Preferred Stock, the Corporation will have the right, at the Corporation’s option, to redeem all or any portion of the shares of Series J Preferred Stock at a price per share equal to 100% of the $1,000 per share stated value of the shares being redeemed. Series J Preferred Stock is not entitled to dividends, interest and voting rights. The Series J Preferred Stock is convertible into the Company’s common stock, at stated value, at a conversion price equal to 100% of the arithmetic average of the VWAP of the common stock for the fifteen trading days prior to the six-month anniversary of the Issuance Date.

 

On August 25, 2016, PositiveID completed the acquisition and entered into an agreement with the Sanomedics and Thermomedics (the “August Agreement”), which amends certain terms of the Purchase Agreement and terminates the Control Agreement. The amendments to the Purchase Agreement include: (a) that any legal expense or losses incurred by PositiveID after June 30, 2016 related to the Exergen litigation shall have the effect of reducing any future earnouts that may be owed to the Sanomedics, dollar for dollar; (b) PositiveID and the Sanomedics also agreed to settle the final closing net working capital adjustment through a reduction of the Series J Preferred Stock shares to be released from escrow. As a result, the 125 shares of Preferred Series J stock originally issued shall be released from escrow as follows