PositiveID
POSITIVEID Corp (Form: 10-Q, Received: 05/06/2010 16:44:13)
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-33297
POSITIVEID CORPORATION
(Exact name of registrant as specified in its charter)
     
DELAWARE   06-1637809
(State or other jurisdiction of incorporation or   (I.R.S. Employer Identification No.)
organization)    
     
1690 South Congress Avenue, Suite 200   (561) 805-8008
Delray Beach, Florida 33445   (Registrant’s telephone number, including area code)
(Address of principal executive offices,    
including zip code)    
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of shares outstanding of each of the issuer’s classes of common stock as of the close of business on April 30, 2010 is as follows:
     
Class   Number of Shares
     
Common Stock: $0.01 Par Value   26,105,071
 
 

 

 


 

POSITIVEID CORPORATION
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  Exhibit 3.1
  Exhibit 10.1
  Exhibit 31.1
  Exhibit 31.2
  Exhibit 32.1

 

 


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PART I — FINANCIAL INFORMATION
Item 1.   Financial Statements.
POSITIVEID CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except share data and par value)
                 
    March 31,     December 31,  
    2010     2009  
    (Unaudited)        
Assets
               
Current Assets:
               
Cash
  $ 4,911     $ 6,423  
Prepaid expenses and other current assets
    261       193  
 
           
Total Current Assets
    5,172       6,616  
 
           
 
               
Equipment, net of accumulated depreciation
    133       122  
Intangibles
    1,212        
Other assets
    34       34  
Goodwill
    2,450       4,200  
 
           
 
               
 
  $ 9,001     $ 10,972  
 
           
Liabilities and Stockholders’ Equity
               
Current Liabilities:
               
Accounts payable
  $ 658     $ 576  
Accrued expenses and other current liabilities
    804       775  
Accrued preferred stock dividend payable
    204       90  
 
           
Total Current Liabilities
    1,666       1,441  
 
           
 
               
Commitments and contingencies
               
 
               
Stockholders’ Equity:
               
Preferred stock, authorized 5,000,000 shares of $.001 par value; 462 shares issued and outstanding at March 31, 2010 and December 31, 2009 (liquidation preference of $4,620 March 31, 2010 and December 31, 2009)
           
Common stock, authorized 70,000,000 shares of $.01 par value; issued and outstanding 23,356,908 and 21,840,433 shares at March 31, 2010 and December 31, 2009, respectively
    234       218  
Additional paid-in capital
    64,652       63,018  
Accumulated deficit
    (57,551 )     (53,705 )
 
           
Total Stockholders’ Equity
    7,335       9,531  
 
           
 
  $ 9,001     $ 10,972  
 
           
See accompanying notes to unaudited condensed consolidated financial statements.

 

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POSITIVEID CORPORATION
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
                 
    For the Three Months Ended  
    March 31,  
    2010     2009  
 
               
Revenue
  $ 673     $ 8  
Cost of sales
    216        
 
           
Gross profit
    457       8  
 
               
Operating expenses:
               
Selling, general and administrative
    3,780       1,370  
Research and development
    538        
 
           
Total operating expenses
    4,318       1,370  
 
               
Operating loss
    (3,861 )     (1,362 )
 
               
Other income, net
    15       12  
 
           
Net loss
    (3,846 )     (1,350 )
Preferred stock dividend
    (114 )      
 
           
Net loss attributable to common stockholders
  $ (3,960 )   $ (1,350 )
 
           
Net loss attributable to common shareholders per common share — basic and diluted
  $ (0.20 )   $ (0.11 )
 
           
Weighted average number of shares outstanding — basic and diluted
    19,865       12,043  
See accompanying notes to unaudited condensed consolidated financial statements.

 

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POSITIVEID CORPORATION
Condensed Consolidated Statement of Stockholders’ Equity
For the Three Months Ended March 31, 2010
(In thousands)
(Unaudited)
                                                                 
                                                    Accumulated        
                                    Additional             Other     Total  
    Preferred Shares     Common Shares     Paid-in     Accumulated     Comprehensive     Stockholders’  
    Number     Amount     Number     Amount     Capital     Deficit     Loss     Equity  
 
                                                               
Balance December 31, 2009
    462             21,840     $ 218     $ 63,018     $ (53,705 )   $     $ 9,531  
Net loss
                                  (3,846 )           (3,846 )
Share based compensation
                585       6       1,088                   1,094  
Issuance of shares from option exercises
                632       7       312                   319  
Accrual of preferred stock dividend
                            (114 )                 (114 )
Shares issued for the acquisition of Easy Check
                300       3       348                   351  
 
                                               
Balance March 31, 2010
    462             23,357     $ 234     $ 64,652     $ (57,551 )   $     $ 7,335  
 
                                               
See accompanying notes to unaudited condensed consolidated financial statements.

 

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POSITIVEID CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
                 
    For the Three Months Ended  
    March 31,  
    2010     2009  
 
               
Cash flows from operating activities:
               
Net loss
  $ (3,846 )   $ (1,350 )
Adjustments to reconcile net loss to net cash used in operating activities
               
Depreciation and amortization
    546       8  
Share based compensation
    1,094       239  
Acquisition of in-process research and development
    351        
Gain on sale of fixed asset
          (1 )
Issuance of shares for settlement of litigation
          250  
Non cash interest income
          (5 )
Changes in operating assets and liabilities:
               
Increase (decrease) in prepaid expenses and other current assets
    (68 )     24  
Increase (decrease) in accounts payable and accrued expenses
    111       (119 )
Net cash used in discontinued operations
          (60 )
 
           
Net cash used in operating activities
    (1,812 )     (1,014 )
 
           
 
               
Cash flows from investing activities:
               
Purchase of equipment
    (19 )     (9 )
Proceeds from sale of equipment
          5  
 
           
Net cash used in investing activities
    (19 )     (4 )
 
           
 
               
Cash flows from financing activities:
               
Proceeds from exercise of stock options
    319        
 
           
Net cash provided by financing activities
    319        
 
           
 
               
Net decrease in cash
    (1,512 )     (1,018 )
Cash, beginning of period
    6,423       3,229  
 
           
Cash, end of period
  $ 4,911     $ 2,211  
 
           
See accompanying notes to unaudited condensed consolidated financial statements.

 

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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
1. Business and Basis of Presentation
PositiveID Corporation (the “Company”) is a Delaware corporation formed in November 2001. The Company commenced operations in January 2002 as VeriChip Corporation. On February 14, 2007, the Company completed an initial public offering of its common stock, selling 3,100,000 shares of its common stock at a price of $6.50 per share.
The Company has historically developed, marketed and sold radio frequency identification, frequently referred to as RFID, systems used for the identification of people in the healthcare market. Beginning in the fourth quarter of 2009, with the acquisition of Steel Vault Corporation (“Steel Vault”), the Company is pursuing its strategy to provide unique health and security identification tools to protect consumers and businesses, operating in two key segments: HealthID and ID Security.
The Company’s HealthID segment is focused on the development of the glucose-sensing microchip, with Receptors, LLC. In the field of diabetes management the Company also acquired, in February 2010, the assets of Easy Check Medical Diagnostics, LLC (“Easy Check”), including the Easy Check breath analysis system and the iGlucose™ wireless communication system. The Company issued 300,000 shares of common stock with a fair value of $351,000 as consideration for this transaction. As the development of these projects had not yet reached technological feasibility, the Company recorded the value of this transaction as research and development in the accompanying condensed consolidated statement of operations for the period ended March 31, 2010.
The Company is also continuing the development of the Rapid Flu Detection system, and other health related products, built on the Company’s core intellectual property. The HealthID segment also includes the VeriMed system, which uses an implantable passive RFID microchip (the “VeriChip”) that is used in patient identification applications. Each implantable microchip contains a unique verification number that is read when it is scanned by the Company’s scanner. In October 2004, the U.S. Food and Drug Administration, or FDA, cleared its VeriMed Health Link system for use in medical applications in the United States.
The Company’s ID Security segment includes its Identity Security suite of products, sold through its NationalCreditReport.com brand and its Health Link personal health record (“PHR”). The Company’s NationalCreditReport.com business was acquired in conjunction with its merger with Steel Vault in November 2009. NationalCreditReport.com offers consumers a variety of identity security products and services primarily on a subscription basis. These services help consumers protect themselves against identity theft or fraud and understand and monitor their credit profiles and other personal information, which include credit reports, credit monitoring and credit scores. In the first quarter of 2010, the Company re-launched its Health Link PHR business. The Company plans to focus its marketing efforts on partnering with health care providers and exchanges, physician groups, Electronic Medical Record (“EMR”) system vendors, and insurers to use Health Link as a PHR provided to their patients. The Company will also seek to partner with pharmaceutical companies who wish to communicate with its online community through various forms of value added content and advertising.
The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries as of March 31, 2010 and December 31, 2009 (the December 31, 2009 financial information included in this report has been extracted from the Company’s audited financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2009), and for the three months ended March 31, 2010 and 2009 have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments (including normal recurring adjustments) considered necessary to present fairly the unaudited condensed consolidated financial statements have been made.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Included in these estimates are assumptions about allowances for excess inventory, bad debt reserves, lives of long lived assets, lives of intangible assets, assumptions used in Black-Scholes valuation models, estimates of the fair value of acquired assets and assumed liabilities, the determination of whether any impairment is to be recognized on goodwill or intangibles, among others.

 

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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
The unaudited condensed consolidated statements of operations for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the entire year. These statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
Revenue Recognition
The Company’s revenue recognition policy is as follows:
Product Sales
Revenue from product sales are recorded at gross amounts. As the Company is in the initial process of commercializing these systems, the level of distributor or physician returns cannot yet be reasonably estimated. Accordingly, the Company does not recognize revenues until the following criteria are met:
    a purchase order has been received or a contract has been executed;
 
    the product is shipped;
 
    title has transferred;
 
    the price is fixed or determinable;
 
    there are no uncertainties regarding customer acceptance;
 
    collection of the sales proceeds is reasonably assured; and
 
    the period during which the distributor or physician has a right to return the product has elapsed.
The Company intends to recognize revenue from consignment sales, if any, when all of the criteria listed above have been met and after the receipt of notification of such product sales from the distributor’s customers (e.g., physicians). Once the level of returns can be reasonably estimated, revenues (net of expected returns) will be recognized when all of the criteria above are met for either direct or consignment sales.
Health Link and VeriMed Services
The services for maintaining subscriber information on the Company’s Health Link and VeriMed databases are sold on a stand-alone contract basis, and treated according to the terms of the contractual arrangements then in effect. Revenue from the database service will be recognized over the term of the subscription period or the terms of the contractual arrangements then in effect.
With respect to the sales of products whose functionality is dependent on services (e.g., database records maintenance), the revenue recognition policy will follow the ultimate arrangements.
ID Security Services
Revenue is recognized when persuasive evidence of an arrangement exists, collectibility of arrangement consideration is reasonably assured, the arrangement fees are fixed or determinable and delivery of the product or service has been completed. A significant portion of the Company’s revenue is derived from the Company’s processing of transactions related to the provision of information services to customers, in which case revenue is recognized, assuming all other revenue recognition criteria are met, when the services are provided. Another portion of the Company’s revenues relate substantially to monthly subscription fee-based credit monitoring contracts under which a customer pays a preset fee for a predetermined or unlimited number of transactions or services provided during the subscription period. Revenue related to subscription fee-based contracts having an unlimited volume is recognized ratably during the contract term.

 

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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
If at the outset of an arrangement, the Company determines that collectability is not reasonably assured, revenue is deferred until the earlier of when collectability becomes probable or the receipt of payment. If there is uncertainty as to the customer’s acceptance of the Company’s deliverables, revenue is not recognized until the earlier of receipt of customer acceptance or expiration of the acceptance period. If at the outset of an arrangement, the Company determines that the arrangement fee is not fixed or determinable, revenue is deferred until the arrangement fee becomes estimable, assuming all other revenue recognition criteria have been met.
In October 2009, the FASB issued amended revenue recognition guidance for arrangements with multiple deliverables. The new guidance requires the use of management’s best estimate of selling price (BESP) for the deliverables in an arrangement when vendor specific objective evidence (VSOE), vendor objective evidence (VOE) or third party evidence (TPE) of the selling price is not available. In addition, excluding specific software revenue guidance, the residual method of allocating arrangement consideration is no longer permitted, and an entity is required to allocate arrangement consideration using the relative selling price method. In accordance with the guidance, the company has elected to early adopt its provisions as of January 1, 2010 on a prospective basis for all new or materially modified arrangements entered into on or after that date. The adoption of this guidance did not have a material impact on the condensed consolidated financial statements.
As discussed above, effective January 1, 2010 the company has adopted on a prospective basis for all new or materially modified arrangements entered into on or after that date the amended accounting guidance for multiple-deliverable revenue arrangements and the amended guidance related to the scope of existing software revenue recognition guidance. The amended guidance does not generally change the units of accounting for the company’s revenue transactions. Most of the company’s products and services qualify as separate units of accounting.
To the extent the Company sells products that may consist of multiple deliverables the revenue recognition is subject to specific guidance that deliverable is accounted for in accordance with such specific guidance. A multiple-deliverable arrangement is separated into more than one unit of accounting if the following criteria are met:
    The delivered item(s) has value to the client on a stand-alone basis; and
 
    If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the company.
If these criteria are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered. If these criteria are met for each element and there is a relative selling price for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative selling price.
Deferred revenue consists of amounts billed in excess of revenue recognized on sales of information services, relating generally to subscription fees.
Share-Based Compensation
Share-based compensation expenses are reflected in the Company’s consolidated statement of operations under selling, general and administrative expenses and research and development expenses.
The Company’s computation of expected life is determined based on the simplified method as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term due to the limited period of time its equity shares have been publicly traded. The interest rate is based on the U.S. Treasury Yield curve in effect at the time of grant. The Company’s computation of expected volatility is based on the historical volatility of comparable companies’ average historical volatility.
Share-based compensation expense is reflected in the condensed consolidated statement of operations in selling, general and administrative expense and research and development expenses.
Research and Development
Research and development costs are expensed as incurred and consist of development work associated with the Company’s existing and potential products. The Company’s research and development expenses relate primarily to share-based compensation to its project partner Receptors, LLC, payroll costs for engineering personnel and costs associated with various projects, including testing, developing prototypes and related expenses.
Loss Per Common Share and Common Share Equivalent
The Company presents basic income (loss) per common share and, if applicable, diluted income (loss) per share, pursuant to the provisions of ASC 260 “Earnings Per Share.” Basic income (loss) per common share is based on the weighted average number of common shares outstanding in each year and after preferred stock dividend requirements. The calculation of diluted income (loss) per common share assumes that any dilutive convertible preferred shares outstanding at the beginning of each year or the date issued were convertible at those dates, with preferred stock dividend requirements and outstanding common shares adjusted accordingly. It also assumes that outstanding common shares were increased by shares issuable upon exercise of those stock options and warrants for which average period market price exceeds exercise price, less shares that could have been purchased by the Company with related proceeds.
The Company issued two tranches of Series A Preferred Stock (the “Preferred Stock”) of 296 and 166 shares at $10,000 per share in September and October 2009, respectively. The preferred shares are non-voting, non-participating and may be converted into common shares or cash at the Company’s option. The conversion of the preferred shares is determined by a fixed conversion price which was determined upon the closing of the preferred shares, $3.07 and $1.60, respectively. Therefore the two tranches of preferred shares are convertible into approximately 964,000 and 1,037,000 common shares, respectively.
The Company is required to issue an annual dividend on the Preferred Stock payable in Preferred Stock on the anniversary date of the tranche closing. As of March 31, 2010, a preferred dividend with a fair value of $204,000 has been accrued and would be convertible into approximately 86,000 shares of common stock.

 

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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
If at the Company’s option, it elects to convert the Preferred Stock into common shares the Company will be required to provide the holders with a specified return as discussed in Note 4 — Financing Agreements. The two tranches would be convertible into a maximum of approximately 2.9 million common shares after the fourth anniversary of the issuances of each tranche.
Had the Company elected to convert all the then outstanding 462 shares of Preferred Stock on March 31, 2010, the preferred holder would have been entitled to 2,702,000 common shares with a fair value of approximately $3,512,000 based upon the closing price of the Company’s common stock on March 31, 2010.
The following were outstanding as of March 31, 2010 and 2009, and were not included in the computation of dilutive loss per share because the net effect would have been anti-dilutive:
                 
    Three Months Ended  
    March 31,  
    2010     2009  
 
               
Convertible preferred stock and accrued dividends
    2,087        
Stock options
    3,546       1,004  
Warrants
    454        
Unvested restricted common stock
    2,645       1,417  
 
           
 
    8,732       2,421  
 
           
2. Principles of Consolidation
The financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances had been eliminated in consolidation.
3. Acquisitions
Merger with Steel Vault
On September 4, 2009, the Company, VeriChip Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of the Company (the “Acquisition Subsidiary”), and Steel Vault, signed an Agreement and Plan of Reorganization (the “Merger Agreement”), dated September 4, 2009, as amended, pursuant to which the Acquisition Subsidiary was merged with and into Steel Vault on November 10, 2009, with Steel Vault surviving and becoming a wholly-owned subsidiary of the Company (the “Merger”). The Merger Agreement provided for the Company’s conversion of each outstanding share of Steel Vault’s common stock into 0.5 shares of common stock of the Company. At the time the Merger Agreement was signed, in September 2009, the value of the transaction was measured at $3.5 million. Such value was validated through independent valuations. At the time the Merger was consummated, the stock price of the Company was $1.71 per share as compared to $0.65 during September 2009 when the merger agreement was executed. As a result, at the effective time of the Merger, in November 2009, the value of the transaction amounted to $13.7 million as compared to approximately $3.5 million at the time the merger agreement was signed in September 2009. The purchase price includes Steel Vault’s approximately 6,696,000 stock options and 908,000 warrants outstanding which were converted into 3,349,000 options and 454,000 warrants to acquire shares of the Company’s common stock at the effective exchange date rate, and which were measured at the fair value using the Black-Scholes model on the Merger completion date.

 

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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Based on an assessment underlying the preliminary purchase price allocation the Company performed as of December 31, 2009, the determination was made that the estimated fair value of Steel Vault was approximately $3.5 million as of December 31, 2009. Accordingly, the Company recognized a charge attributable to the reduced carrying amount of goodwill by approximately $10.2 million. The total purchase price of the business acquired was allocated based on a final valuation as follows:
         
 
       
Cash
  $ 72  
 
       
Equipment and other assets
    142  
 
       
Trademarks and domain names
    500  
 
       
Subscriber base
    1,250  
 
       
Goodwill
    2,450  
 
       
Current liabilities
    (910 )
 
     
 
       
Total
    3,504  
 
       
Charge attributable to adjustment of goodwill
    10,170  
 
     
 
       
Total price paid
  $ 13,674  
 
     
The primary reasons the purchase price of the acquisition exceeded the fair value of the net assets acquired, which resulted in the recognition of goodwill of $2.5 million, were to provide entry into the industry and growth opportunities from new or enhanced product offerings and the acquisition of the existing workforce that are not recognized as assets apart from goodwill. In addition, the Company identified intangible assets for trademarks and domain names of $500,000 with a life of 5 years, and a subscriber base of $1,250,000 with a life of 12 months. Amortization expense of $538,000 was recorded for the three months ended March 31, 2010 associated with the intangible assets.
Easy Check Asset Purchase
On February 11, 2010, the Company purchased the assets of Easy Check, including the Easy Check breath analysis system and the iGlucose TM wireless communication system. The Company issued 300,000 shares of common stock in connection with the purchase with a fair value of $351,000 based on a stock price of $1.17. The entire purchase price was expensed as in-process research and development as the development of these projects had not yet reached technological feasibility and had no alternative future uses. Easy Check did not have any tangible assets at the time of the purchase.
Proforma
The results of Steel Vault have been included in the condensed consolidated statements of operations since the date of acquisition. Unaudited pro forma results of operations for the three months ended March 31, 2009 are included below. Such pro forma information assumes that the Steel Vault acquisition occurred as of January 1, 2009, and revenue is presented in accordance with the Company’s accounting policies. This summary is not necessarily indicative of what the Company’s results of operations would have been had the Company and Steel Vault been combined entities during such period, nor does it purport to represent results of operations for any future periods.

 

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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
         
    Three Months Ended  
(In thousands, except per share amounts)   March 31, 2009  
 
       
Revenue
  $ 66  
Net loss attributable to common shareholders
  $ (2,354 )
Net loss attributable to common shareholders per common share — basic and diluted
  $ (0.19 )
4. Financing Agreements
On September 29, 2009, the Company entered into a Convertible Preferred Stock Purchase Agreement (the “Purchase Agreement”) with Optimus, under which Optimus is committed to purchase up to $10 million of convertible Preferred Stock in one or more tranches. Under the terms of the Purchase Agreement, from time to time and at the Company’s sole discretion, the Company may present Optimus with a notice to purchase such Preferred Stock (the “Notice”).
To facilitate the transactions contemplated by the Purchase Agreement, R & R Consulting Partners, LLC (“R & R”), a company controlled by Scott R. Silverman, the Company’s chairman and chief executive officer, loaned shares of common stock to Optimus equal to 135% of the aggregate purchase price for each tranche pursuant to Stock Loan Agreements between R & R and Optimus. R & R was paid a $100,000 fee in October 2009 plus will be paid 2% interest for the fair value of the loaned shares for entering into the stock loan arrangement. The aggregate amount of shares loaned under any and all Stock Loan Agreements, together with all other shares sold by or on behalf of the Company, cannot exceed one-third of the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Company in any 12 month period. R & R may demand return of some or all of the borrowed shares (or an equal number of freely tradable shares of common stock) at any time on or after the six-month anniversary date such borrowed shares were loaned to Optimus, but no such demand may be made if there are any shares of Preferred Stock then outstanding. If a permitted return demand is made, Optimus will return the borrowed shares within three trading days after such demand (or an equal number of freely tradable shares of common stock). Optimus may return the borrowed shares in whole or in part, at any time or from time to time, without penalty or premium. On September 29, 2009, October 8, 2009, and October 21, 2009, R & R loaned Optimus 1.3 million, 800,000 and 600,000 shares, respectively, of Company common stock.
Optimus is obligated to purchase such Preferred Stock on the tenth trading day after any Notice date, subject to satisfaction of certain closing conditions, including (i) that the Company is listed for and trading on a trading market, (ii) the representations and warranties of the Company set forth in the Purchase Agreement are true and correct as if made on each tranche date, (iii) Optimus shall have received a commitment fee of $800,000 payable only on the first tranche closing date in the event the gross proceeds from the first tranche closing exceed $800,000; and (iv) that no such purchase would result in Optimus and its affiliates beneficially owning more than 9.99% of the Company’s common stock. In the event the closing bid price of the Company’s common stock during any one or more of the nine trading days following the delivery of a Notice falls below 75% of the closing bid price on the trading day prior to the Notice date and Optimus determines not to complete the tranche closing, then the Company may, at its option, proceed to issue some or all of the applicable shares, provided that the conversion price for the Preferred Stock that is issued shall reset at the lowest closing bid price for such nine trading day period.
Dividends and Other Distributions. Commencing on the first anniversary of the date of issuance of any such shares of Preferred Stock, holders of Preferred Stock shall be entitled to receive dividends on each outstanding share of Preferred Stock, which shall accrue in shares of Preferred Stock at a rate equal to 10% per annum from the date of issuance. Accrued dividends shall be payable annually on the anniversary of the issuance date. No dividend shall be payable with respect to shares of Preferred Stock that are redeemed for cash or converted into shares of common stock prior to the first anniversary of the issuance date with respect to such shares. For the three months ended March 31, 2010, the Company had accrued dividends of $204,000 (approximately $137,000 and $67,000 for the first and second tranche, respectively.).

 

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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Liquidation. Upon any liquidation, dissolution or winding up of the Company after payment or provision for payment of debts and other liabilities of the Company, before any distribution or payment is made to the holders of any other class or series of stock, the holders of Preferred Stock shall first be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount with respect to the Preferred Stock liquidation value, after which any remaining assets of the Company shall be distributed among the holders of the other class or series of stock in accordance with the Company’s Certificates of Designations and Certificate of Incorporation. At March 31, 2010, the liquidation value was $4.6 million.
Redemption . The Company may redeem, for cash, any or all of the Preferred Stock at any time at the redemption price per share equal to $10,000 per share of Preferred Stock (the “Series A Liquidation Value”), plus any accrued but unpaid dividends with respect to such shares of Preferred Stock (the “Redemption Price”). If the Company exercises this redemption option with respect to any Preferred Stock prior to the fourth anniversary of the issuance of such Preferred Stock, then in addition to the Redemption Price, the Company must pay to Optimus a make-whole price per share equal to the following with respect to such redeemed Preferred Stock: (i) 35% of the Series A Liquidation Value if redeemed prior to the first anniversary of the issuance date, (ii) 27% of the Series A Liquidation Value if redeemed on or after the first anniversary but prior to the second anniversary of the issuance date, (iii) 18% of the Series A Liquidation Value if redeemed on or after the second anniversary but prior to the third anniversary of the issuance date, and (iv) 9% of the Series A Liquidation Value if redeemed on or after the third anniversary but prior to the fourth anniversary of the issuance date.
In addition, the Company’s redemption of the Preferred Stock, to the extent such Preferred Stock was not converted into shares of common stock, was mandatory in the event that the Company did not receive stockholder approval for the transactions described in the Purchase Agreement on or before March 31, 2010, which approval was obtained on November 10, 2009.
On September 29, 2009, the Company exercised the first tranche of this financing, to issue 296 shares of Preferred Stock, for a tranche amount of approximately $3.0 million at a conversion price of $3.07 per share of common stock. In support of this tranche, R & R loaned Optimus 1.3 million shares of common stock. This tranche closed on October 13, 2009, and the Company received proceeds of approximately $3.0 million, less the fees due on the entire financing commitment of $800,000. On November 5, 2009, the Company closed the second tranche of this financing, issuing 166 shares of Preferred Stock, for a tranche amount of approximately $1.7 million at a conversion price of $1.60 per share of common stock. In support of this tranche, R & R loaned Optimus approximately 1.4 million shares of common stock. There was no beneficial conversion feature on the Preferred Stock as the stock prices were greater than the conversion prices on the dates of issuance.
As of March 31, 2010, the Preferred Stock and related accrued dividends are convertible into approximately 2.1 million shares of common stock. As of March 31, 2010 the total amount of common stock the Preferred Stock and dividends are convertible into over the life of the Preferred Stock is 2.9 million shares.
5. Stockholders’ Equity
Stock Option Plans
In April 2002, the Company’s Board of Directors approved the VeriChip Corporation 2002 Flexible Stock Plan (the “VeriChip 2002 Plan”). Under the VeriChip 2002 Plan, the number of shares for which options, SARs or performance shares may be granted is approximately 2.0 million. As of March 31, 2010, approximately 1.9 million options and restricted shares, net of forfeitures, have been granted to directors, officers and employees under the VeriChip 2002 Plan, and 0.3 million of the options or shares granted were outstanding as of March 31, 2010. All the outstanding options are fully vested and do not expire until seven to nine years from the vesting date. As of March 31, 2010, no SARs have been granted and 30,108 shares may still be granted under the VeriChip 2002 Plan.
On April 27, 2005, the Company’s Board of Directors approved the VeriChip Corporation 2005 Flexible Stock Plan (the “VeriChip 2005 Plan”). Under the VeriChip 2005 Plan, the number of shares for which options, SARs or performance shares may be granted is approximately 0.3 million. As of March 31, 2010, approximately 0.3 million options have been granted under the VeriChip 2005 Plan. All of the options are fully vested and do not expire until nine years from the vesting date. As of March 31, 2010, no SARs have been granted and 832 shares may still be granted under the VeriChip 2005 Plan.

 

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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
On June 17, 2007, the Company adopted the VeriChip 2007 Stock Incentive Plan, which was amended and restated on December 16, 2008 (the “VeriChip 2007 Plan”). Under the VeriChip 2007 Plan, the number of shares for which options, restricted shares, SARs or performance shares may be granted is 3.0 million. As of March 31, 2010, approximately 3.0 million options and shares have been granted under the VeriChip 2007 Plan. As of March 31, 2010, no SARs have been granted and 12,962 shares may be granted under the VeriChip 2007 Plan.
On November 10, 2009, the Company adopted the VeriChip 2009 Stock Incentive Plan (the “VeriChip 2009 Plan”). Under the VeriChip 2009 Plan, the number of shares for which options, SARs or performance shares may be granted is 5.0 million. As of March 31, 2010, approximately 2.2 million options and shares have been granted under the VeriChip 2009 Plan. As of March 31, 2010, no SARs have been granted and 2.8 million shares may be granted under the VeriChip 2009 Plan.
In addition, as of March 31, 2010, 0.3 million options and shares of the Company’s common stock have been granted outside of the Company’s plans, and 0.3 million of the options or shares granted were outstanding as of March 31, 2010. These options were granted at exercise prices ranging from $0.23 to $8.55 per share, are fully vested and are exercisable for a period of up to seven years.
At the effective time of the Merger, the Company assumed all of Steel Vault’s obligations under the SysComm International Corporation 2001 Flexible Stock Plan, as amended and restated, and each option outstanding thereunder, provided that the obligation to issue shares of the Company’s stock, as adjusted to reflect the exchange ratio set forth in the Merger Agreement, was substituted for the obligation to issue shares of Steel Vault common stock.
On November 10, 2009, pursuant to the Steel Vault Merger, approximately 6.7 million outstanding Steel Vault options were converted into 3.3 million Company options. These options were granted at exercise prices ranging from $0.36 to $2.00 per share, are fully vested and are exercisable for a period up to ten years from the vest date.
A summary of option activity under the Company’s option plans as of March 31, 2010, and changes during the three months then ended is presented below:
                 
            Weighted Average  
    Number of     Exercise Price Per  
    Options     Share  
Outstanding on January 1, 2010
    4,215     $ 1.73  
Granted
           
Exercised
    (632 )     0.50  
Forfeited
    (37 )     0.28  
 
             
Outstanding on March 31, 2010
    3,546       1.97  
 
             
Exercisable on March 31, 2010 (1)
    3,440       2.02  
 
             
       
Shares available on March 31, 2010 for options and common shares that may be granted
    2,809          
     
(1)   The intrinsic value of a stock option is the amount by which the fair value of the underlying stock exceeds the exercise price of the option. Based upon the Company’s closing price on the NASDAQ, the fair value of the underlying stock was $1.30 at March 31, 2010. As of March 31, 2010, the aggregate intrinsic value of all options outstanding was $2 million.
The 632,000 options exercised during the quarter ended March 2010 had a total intrinsic value of $608,000. Cash received from the option exercise was $319,000. There were no options exercised in the quarter ended March 31, 2009.

 

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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
The following table summarizes information about stock options at March 31, 2010:
                                         
    Outstanding Stock Options     Exercisable Stock Options  
            Weighted-     Weighted-             Weighted-  
            Average     Average             Average  
            Remaining     Exercise             Exercise  
Range of           Contractual     Price Per             Price Per  
Exercise Prices   Shares     Life (years)     Share     Shares     Share  
$0.00 to $0.36
    833       8.65     $ 0.36       833     $ 0.36  
$0.37 to $0.62
    1,167       5.60       0.47       1,061       0.48  
$0.68 to $1.99
    594       2.20       0.83       594       0.83  
$2.00 to $5.75
    523       4.49       4.39       523       4.39  
Above $5.75
    429       3.84       7.78       429       7.78  
 
                                 
 
    3,546       5.37       1.97       3,440       2.02  
 
                                 
A summary of restricted stock outstanding as of March 31, 2010 and 2009 and changes during the three months then ended, respectively, is presented below:
                 
    2010     2009  
Unvested at January 1
    4,192       1,520  
Issued
    420        
Vested
    (1,967 )     (103 )
Forfeited or Expired
           
 
           
Unvested at March 31
    2,645       1,417  
 
           
There are inherent uncertainties in making estimates about forecasts of future operating results and identifying comparable companies and transactions that may be indicative of the fair value of the Company’s securities. The Company believes that the estimates of the fair value of its common stock at each option grant date were reasonable under the circumstances.
The Black-Scholes model, which the Company used to determine compensation expense, required the Company to make several key judgments including:
    the value of the Company’s common stock;
 
    the expected life of issued stock options;
 
    the expected volatility of the Company’s stock price;
 
    the expected dividend yield to be realized over the life of the stock option; and
 
    the risk-free interest rate over the expected life of the stock options.
The Company prepared these estimates based upon its historical experience, the stock price volatility of comparable publicly-traded companies and its best estimation of future conditions.
There were no options granted in the three months ended March 31, 2010 and 2009.
Warrants
On November 10, 2009, pursuant to the Steel Vault Merger, all outstanding Steel Vault warrants were converted into approximately 0.5 million Company warrants. These warrants were granted at exercise prices ranging from $0.60 to $1.16 per share, are fully vested and are exercisable for a period from five to ten years from the vest date. The expiration of 0.2 million warrants is in December 2010, and the expiration of 0.3 million warrants is in 2014.

 

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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Share-Based Compensation
Share-based compensation expense is recognized using the fair-value based method for all awards granted. Compensation expense for awards granted is recognized over the requisite service period based on the grant-date fair value of those options.
Forfeitures are estimated at the time of grant and require the estimates to be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company recorded an expense, related to share based compensation, of approximately $1.1 million and $0.2 million for the three months ended March 31, 2010 and 2009, respectively.
In December 2008, the Company authorized the grant of approximately 519,000 shares of its restricted common stock to Mr. Caragol, its then acting chief financial officer, in lieu of salary. The shares vested according to the following schedule: (i) 20% vested on the grant date, and (ii) 80% vested on January 1, 2010. Compensation expense of approximately nil and $146,000 was recorded in the three months ended March 31, 2010 and 2009, respectively, for these shares.
In December 2008, the Company authorized the grant of approximately 602,000 shares of its restricted common stock to Mr. Silverman, its then executive chairman, in lieu of salary, which vested on January 1, 2010. Compensation expense of approximately nil and $55,000 was recorded in the three months ended March 31, 2010 and 2009, respectively, for these shares.
In December 2008, the Company issued 400,000 shares of its restricted common stock to members of the board of directors, which vested on January 1, 2010. The Company determined the value of the stock to be approximately $100,000 based on the value of its common stock on the date of grant. The value of the outstanding restricted stock was amortized as compensation expense over the vesting period. The Company recorded compensation expense of approximately nil and $36,000 in the three months ended March 31, 2010 and 2009, respectively, associated with this restricted stock.
In December 2008, the Company issued options exercisable for approximately 170,000 shares of common stock; 130,000 to employees and 40,000 to a consultant.
The Company determined the fair value of the 130,000 employee options to be $18,000 on the date of grant based on an estimate of the fair value using the Black-Scholes valuation model as described above. The fair value of the grant is being recognized as compensation expense over the vesting period. Accordingly, the compensation expense recorded in connection with these options was approximately $1,500 for the three months ended March 31, 2010 and 2009.
The Company recorded compensation expense associated with the 40,000 options to the consultant using the variable accounting method which requires the Company to re-measure the compensation expense associated with these options at the end of each reporting period until the options are vested. Compensation expense recorded in connection with these options for the three months ended March 31, 2010 and 2009 was approximately $6,000 and $1,000, respectively.
In September and October 2009, the Company authorized the grant of approximately 350,000 shares of its restricted common stock to a research and development partner. The Company recorded research and development expense associated with the restricted stock using the variable accounting method that requires the Company to re-measure the compensation expense associated with the restricted stock at the end of each reporting period until the restricted stock is vested. Compensation expense recorded in connection with the restricted stock for the three months ended March 31, 2010 was approximately $162,000. The shares were fully vested as of March 31, 2010.
In November and December 2009, the Company authorized the grant of restricted stock for approximately 375,000 shares of common stock: 50,000 to an employee and 325,000 to consultants.
The Company determined the fair value of the 50,000 shares issued to the employee to be approximately $83,000 based on the closing price of the Company’s common stock on the date of grant. The fair value of the grant will be recognized as compensation expense over the vesting period. Accordingly, the Company recognized approximately $15,000 in compensation expense for the three months ended March 31, 2010 in connection with this grant.

 

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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
The Company recorded compensation expense associated with the 325,000 shares of restricted stock issued to consultants using the variable accounting method that requires the Company to re-measure the compensation expense associated with these shares at the end of each reporting period until the shares are vested. Compensation expense recorded in connection with the shares for the three months ended March 31, 2010 was approximately $59,000.
In November 2009, the Company authorized the grant of 2.0 million shares of its restricted common stock to its executive officers which vest on a pro-rata basis through 2012. The Company determined the value of the stock to be $3.3 million based on the value of its common stock on the dates of grant. The value of the outstanding restricted stock is being amortized as compensation expense over the vesting period. The Company recorded compensation expense of approximately $548,000 in the three months ended March 31, 2010 associated with this restricted stock.
In January 2010, the Company authorized the grant of 50,000 shares of its common stock to a consultant. The Company determined the value of the stock to be approximately $56,000 based on the value of its common stock on the dates of grant and recorded the full amount as compensation expense in the three months ended March 31, 2010.
In January 2010, the Company authorized the grant of 100,000 shares of its common stock to an employee, 50% of which vested immediately and the other 50% of which will vest on July 1, 2010. The Company determined the value of the stock to be approximately $109,000 based on the value of its common stock on the dates of grant. The Company recorded compensation expense of approximately $78,000 in the three months ended March 31, 2010 associated with this restricted stock.
In January 2010, the Company authorized the grant of 385,000 shares of its common stock to members of its Board of Directors of which 370,000 shares were restricted. The Company determined the value of the stock to be approximately $420,000 based on the value of its common stock on the dates of grant. The value of the outstanding restricted stock was amortized as compensation expense over the vesting period. The Company recorded compensation expense of approximately $98,000 in the three months ended March 31, 2010 associated with this stock.
In February 2010, the Company authorized the grant of 50,000 shares of its common stock to a consultant. The Company determined the value of the stock to be approximately $70,000 based on the value of its common stock on the dates of grant and recorded the full amount as compensation expense in the three months ended March 31, 2010.
6. Income Taxes
The Company had an effective tax rate of nil for the three months ended March 31, 2010 and 2009. The Company incurred losses before taxes for the three months ended March 31, 2010 and 2009. However, it has not recorded a tax benefit for the resulting U.S. net operating loss carryforwards, as the Company has determined that a valuation allowance against its net U.S. deferred tax assets was appropriate based primarily on its historical operating results.
In January 2010, the Company received a notice from the Canadian Revenue Agency (CRA), that the CRA would be performing a review of Xmark’s Canadian tax returns for the periods 2005 through 2008. The Company plans to comply with all CRA information requests. This review will cover all periods that the Company owned Xmark.
The Company recognizes any interest accrued related to unrecognized tax benefits or exposures in interest expense and penalties in operating expenses. During the three months ended March 31, 2010 and 2009, there was no such interest or penalty.
7. Legal Proceedings
The Company is a party to various legal actions, as either plaintiff or defendant, arising in the ordinary course of business, none of which is expected to have a material adverse effect on its business, financial condition or results of operations. However, litigation is inherently unpredictable, and the costs and other effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings, whether civil or criminal, settlements, judgments and investigations, claims or charges in any such matters, and developments or assertions by or against the Company relating to it or to its intellectual property rights and intellectual property licenses could have a material adverse effect on the Company’s business, financial condition and operating results.

 

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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
8. Related Party Transactions
Blue Moon
As of April 26, 2010, Mr. Silverman beneficially owned 41.4% of the Company’s outstanding common stock, including the 1,035,000 shares that are directly owned by Blue Moon Energy Partners, LLC (“Blue Moon”) and 4,755,556 directly owned by R & R. Mr. Silverman, the Company’s chief executive officer and chairman of the Board of Directors, is a manager and controls a member of Blue Moon (i.e., R & R). William J. Caragol, the Company’s president, chief financial officer and member of the Board of Directors, is a manager and member of Blue Moon.
Optimus Financing
On September 29, 2009, the Company entered into the Purchase Agreement with Optimus, under which Optimus is committed to purchase up to $10 million of convertible Preferred Stock in one or more tranches. To facilitate the transactions contemplated by the Purchase Agreement, R & R loaned shares of common stock to Optimus equal to 135% of the aggregate purchase price for each tranche pursuant to Stock Loan Agreements between R & R and Optimus. For more information regarding this transaction, see Note 4, “Financing Agreements,” to these condensed consolidated financial statements.
9. Segments
Since the Merger with Steel Vault on November 10, 2009, the Company operates in two business segments: HealthID and ID Security.
HealthID Segment
The Company HealthID segment in conjunction with its development partner, Receptors, LLC, is currently focused on the development of the glucose-sensing microchip. In the field of diabetes management the Company acquired, in February 2010, the assets of Easy Check Medical Diagnostics, LLC, including the Easy Check breath analysis system and the iGlucose wireless communication system. All three of these products are currently under development.
The Company also intends to continue the development of the Rapid Flu Detection system, and other health related products, built on the Company’s core intellectual property. The Company’s HealthID segment also includes the VeriMed system, which uses the RFID microchip VeriChip that is used in patient identification applications. Each implantable microchip contains a unique verification number that is read when it is scanned by the Company’s scanner. In October 2004, the FDA, cleared the Company’s VeriMed Health Link system for use in medical applications in the United States.
ID Security Segment
The Company’s ID Security segment focuses on selling a variety of identity security products and services primarily on a subscription basis through its subsidiary, NationalCreditReport.com. These services help consumers protect themselves against identity theft or fraud and understand and monitor their credit profiles and other personal information, which include credit reports, credit monitoring and credit scores.
In the first quarter of 2010, the Company re-launched its Health Link PHR business. The Company plans to focus its marketing efforts on partnering with health care providers and exchanges, physician groups, EMR system vendors, and insurers to use Health Link as a PHR provided to their patients. The Company will also seek to partner with pharmaceutical companies who wish to communicate with its online community through various forms of value added content and advertising.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on segment income as presented below.

 

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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
The following is selected segment data as of and for the period ended:
                         
                    Total From  
    Health     ID     Continuing  
    ID     Security     Operations  
As of and For the Three Months Ended March 31, 2010
                       
Revenue
  $ 75     $ 598     $ 673  
Operating loss
    (2,695 )     (1,166 )     (3,861 )
Loss from continuing operations before income taxes
    (2,683 )     (1,163 )     (3,846 )
 
                       
Total assets of continuing operations
  $ 4,902     $ 4,099     $ 9,001  
                         
                    Total From  
    Health     ID     Continuing  
    ID     Security     Operations  
As of and For the Three Months Ended March 31, 2009
                       
Revenue
  $ 8     $     $ 8  
Operating loss
    (1,362 )           (1,362 )
Loss from continuing operations before income taxes
    (1,350 )           (1,350 )
 
                       
Total assets of continuing operations
  $ 7,046     $     $ 7,046  
10. Supplementary Cash Flow Information
In the three months ended March 31, 2010 and 2009, the Company had the following non-cash investing and financing activities:
                 
    Three Months Ended  
    March 31,  
    2010     2009  
Non-cash financing and investing activities:
               
Accrued dividend payable
    114        
Issuance of common stock and options for Easy Check acquisition
    351        
11. Subsequent Events
Development/Master Agreement
On April 22, 2010, the Company amended its Development/Master Agreement with Receptors, LLC in conjunction with Phase II of that development program. The goal of Phase II is to develop a prototype sensing system to sub-type identify the influenza virus, especially H1N1, in a nasal swab or nasal wash sample. As part of this agreement, the Company will pay Receptors LLC $160,000 and issue to it 240,000 shares of Company common stock.
Preferred Stock Purchase Agreement
On April 28, 2010, the Company entered into a Preferred Stock Purchase Agreement (the “Preferred Purchase Agreement”) with Socius Capital Group, LLC doing business as Socius Technology Capital Group, LLC (“Socius Technology”) under which Socius Technology is committed to purchase up to $4.2 million in shares of non-convertible Series B Preferred Stock of the Company (the “Preferred Stock”) in one or more tranches (each a “Preferred Tranche”), at $10,000 per share of Preferred Stock. Under the terms of the Preferred Purchase Agreement, from time to time and at the Company’s sole discretion, the Company may present Socius Technology with a notice to purchase such Preferred Stock (the “Preferred Notice”). Socius Technology is obligated to purchase such Preferred Stock on the third trading day after the Preferred Notice date, subject to satisfaction of certain closing conditions, including (i) that the Company’s common stock is listed for and trading on a trading market, (ii) the representations and warranties of the Company set forth in the Preferred Purchase Agreement are true and correct as if made on each Preferred Tranche date, and (iii) Socius Technology shall have received a commitment fee of $105,000 payable on the first tranche closing date (collectively, the “Closing Conditions”).

 

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POSITIVEID CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(tabulated amounts in thousands of dollars, except per share amounts)
Stock Purchase Agreement
On April 28, 2010, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Socius CG II, Ltd., a Bermuda exempted company (“Socius”) under which Socius is committed to purchase in connection with any Preferred Tranche, up to that number of shares of common stock equal in dollar amount to 100% of the applicable Preferred Tranche amount (the “Common Tranche”), at a per share price equal to the average of the individual daily volume weighted average price calculated over the ten trading days preceding the applicable tranche notice of the common stock on the date the Company provides notice of such tranche (the “Investment Price”). Under the Purchase Agreement, the Company has also agreed to issue in connection with any Common Tranche, two-year warrants to purchase shares of Common Stock equal in dollar amount to 35% of the applicable Common Tranche, at an exercise price per share equal to the Investment Price.
Socius may pay the Investment Price for the common stock, at Socius’ option, in cash or a secured promissory note. Socius may pay the warrant exercise price, at Socius’ option, in cash, a secured promissory note, or, if applicable, by cashless exercise. The promissory note bears interest at 2.0% per year calculated on a simple interest basis. The entire principal balance and interest thereon is due and payable on the fourth anniversary of the date of the promissory note, but no payments are due so long as the Company is in default under the Preferred Purchase Agreement or the warrants or if there are any shares of Preferred Stock issued or outstanding. The promissory note is secured by the borrower’s right, title and interest in all outstanding shares of the Company’s common stock and other securities with a fair market value equal to the principal amount of the promissory note. The Company’s right to deliver a tranche notice to Socius pursuant to the Purchase Agreement is subject to the Closing Conditions and also that no purchase would result in Socius and its affiliates beneficially owning more than 9.99% of the common stock. Unless the Company obtains stockholder approval or Socius obtains an opinion of counsel that stockholder approval is not required, Socius may not exercise a warrant if, as a result of such exercise, the aggregate number of shares of common stock issued upon exercise of all warrants it holds plus the aggregate number of shares of common stock issued under the Purchase Agreement would exceed 19.99% of the Company’s common stock outstanding. If at any time, upon the exercise of all warrants issued to Socius, Socius holds more than 19.99% of the Company’s outstanding common stock, the Company will be required to obtain stockholder approval of the transactions with Socius.
Tranche Draw Down
On April 29, 2010, the Company presented Socius Technology with a Preferred Notice to purchase $2.3 million of Preferred Stock in a Preferred Tranche. Upon the closing of the Preferred Tranche, which occurred on May 4, 2010, the Company issued 230 shares of Preferred Stock. In connection with the Preferred Notice, the Company also presented Socius with a notice to purchase $2.3 million of common stock and warrants to purchase 600,746 shares of common stock. The Company issued 1,716,417 shares of common stock at an Investment Price per share of $1.34, paid in the form a secured promissory note, and a warrant to purchase 600,746 shares of common stock to Socius, at an exercise price equal to the Investment Price of $1.34, which warrant Socius exercised on April 29, 2010 and paid in the form of a secured promissory note.
Executive Compensation
On November 12, 2009, our Compensation Committee approved a 2010 executive compensation arrangement for Messrs. Silverman and Caragol whereby beginning January 1, 2010, Mr. Silverman and Mr. Caragol received a base salary of $375,000 and $225,000, respectively. Additionally, the Compensation Committee has the authority to approve a discretionary bonus for 2010, a portion of which is guaranteed, to each of Mr. Silverman and Mr. Caragol based on the following factors: development of the rapid virus sensor project, development of the glucose-sensing microchip project, the financial performance of the business of our wholly-owned subsidiary, National Credit Report.com, strategic acquisitions, the overall financial condition/health of the business, and such other factors as the Compensation Committee deems appropriate in light of any acquisitions or changes in the business. Mr. Silverman may earn a bonus between $200,000 and $600,000, and Mr. Caragol may earn a bonus between $200,000 and $450,000. Mr. Silverman and Mr. Caragol are entitled to Company-paid health insurance, non-allocable expenses of $45,000 and $20,000, respectively, and each are entitled to an automobile allowance and other automobile expenses, including insurance, gasoline and maintenance costs. On May 4, 2010, our Compensation Committee approved a change to the above-referenced compensation arrangement and in lieu of (i) cash salary for the remainder of 2010 for Messrs. Silverman and Caragol and (ii) the minimum cash bonus obligation of $200,000 to each of Messrs. Silverman and Caragol pursuant to the bonus structure set forth above, it approved the issuance of 675,000 shares of the Company’s restricted stock to Mr. Silverman and 525,000 shares of the Company’s restricted stock to Mr. Caragol. These restricted shares were issued under our 2009 Stock Incentive Plan and will vest according to the following schedule: (i) 50% vest on January 1, 2011; and (ii) 50% vest on January 1, 2012. Mr. Silverman’s and Mr. Caragol’s rights and interests in the unvested portion of the restricted stock are subject to forfeiture in the event they resign prior to January 1, 2012 or are terminated for cause prior to January 1, 2012, with said cause being defined as a conviction of a felony or such person being prevented from providing services to us as a result of such person’s violation of any law, regulation and/or rule. The estimated fair value of the aforementioned 1,200,000 shares is approximately $1.7 million and will be expensed ratably over the vesting period.

 

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Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, without limitation, statements about our market opportunities, our business and growth strategies, our projected revenue and expense levels, possible future consolidated results of operations, the adequacy of our available cash resources, our financing plans, our competitive position and the effects of competition and the projected growth of the industries in which we operate, as well as the following statements:
    we plan to focus our marketing efforts on partnering with heath care providers and exchanges, physician groups, EMR system vendors, and insurers to use Health Link as a PHR provided to their patients;
 
    we seek to partner with pharmaceutical companies who wish to communicate with their online community through various forms of value added content and advertising;
 
    we intend to recognize revenue from consignment sales, if any, when all of the criteria listed under Note 1, “Revenue Recognition,” in our notes to financial statements have been met and after receipt of notification of such product sales from distributor’s customers;
 
    we intend to continue the development of the Rapid Flu Detection system, and other health related products, built on our core intellectual property;
 
    based on projects in progress, we expect research and development to increase;
 
    we expect the trend of selling, general and administrative expenses to be similar on an annualized basis; and
 
    we believe that with the cash we have on hand, we will have sufficient funds available to cover our cash requirements through the next twelve months.
This Quarterly Report on Form 10-Q also contains forward-looking statements attributed to third parties relating to their estimates regarding the size of the future market for products and systems such as our products and systems, and the assumptions underlying such estimates. Forward-looking statements include all statements that are not historical facts and can be identified by forward-looking statements such as “may,” “might,” “should,” “could,” “will,” “intends,” “estimates,” “predicts,” “projects,” “potential,” “continue,” “believes,” “anticipates,” “plans,” “expects” and similar expressions. Forward-looking statements are only predictions based on our current expectations and projections, or those of third parties, about future events and involve risks and uncertainties.
Although we believe that the expectations reflected in the forward-looking statements contained in this Quarterly Report on Form 10-Q are based upon reasonable assumptions, no assurance can be given that such expectations will be attained or that any deviations will not be material. In light of these risks, uncertainties and assumptions, the forward-looking statements, events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Important factors that could cause our actual results, level of performance or achievements to differ materially from those expressed or forecasted in, or implied by, the forward-looking statements we make in this Quarterly Report on Form 10-Q are discussed under “Item 1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2009 and include:
    our ability to continue listing our common stock on the Nasdaq Stock Market (“Nasdaq”);
 
    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;

 

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    our ability to fund our operations and continued development of our products, including the Rapid Flu Detection System, the glucose-sensing microchip, the Easy Check breath glucose detection system and the iGlucose wireless communication system;
 
    our ability to complete the Phase II of the Rapid Flu Detection System by the end of 2010 or at all and Phase II of the glucose-sensing microchip development program by mid 2010 or at all;
 
    our ability to pursue our strategy to offer identification tools and technologies for consumers and businesses;
 
    our ability to maximize the amount of capital that we will have available to pursue business opportunities in the healthcare and energy sectors;
 
    our ability to successfully develop and commercialize the breath glucose detection system and the iGlucose wireless communication device and the glucose-sensing microchip, and the market acceptance of these devices and the microchip;
 
    our ability to obtain patents on our products, including the Easy Check breath glucose detection system and the iGlucose wireless communication device, the validity, scope and enforceability of our patents, and the protection afforded by our patents;
 
    we may become subject to costly product liability claims and claims that our products infringe the intellectual property rights of others;
 
    our ability to comply with current and future regulations relating to our businesses;
 
    uncertainty as to whether a market for our VeriMed system will develop and whether we will be able to generate more than a nominal level of revenue from this business;
 
    the potential for patent infringement claims to be brought against us asserting that we hold no rights for the use of the implantable microchip technology and that we are violating another party’s intellectual property rights. If such a claim is successful, we could be enjoined from engaging in activities to market the systems that utilize the implantable microchip and be required to pay substantial damages;
 
    our ability to provide uninterrupted, secure access to the Health Link and VeriMed databases; and
 
    our ability to establish and maintain proper and effective internal accounting and financial controls.
You should not place undue reliance on any forward-looking statements. In addition, past financial or operating performance is not necessarily a reliable indicator of future performance, and you should not use our historical performance to anticipate future results or future period trends. Except as otherwise required by federal securities laws, we disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based. All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q and under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009. These are factors that could cause our actual results to differ materially from expected results. Other factors besides those listed could also adversely affect us.

 

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q as well as our Annual Report on Form 10-K for the year ended December 31, 2009.
Overview
We have historically developed, marketed and sold radio frequency identification, frequently referred to as RFID, systems used for the identification of people in the healthcare market. Beginning in the fourth quarter of 2009, with the acquisition of Steel Vault, the Company intends to pursue its strategy to provide unique health and security identification tools to protect consumers and businesses, operating in two key segments: HealthID and ID Security.
HealthID Segment
Our HealthID segment is currently focused on the development of the glucose-sensing microchip, based on our proprietary intellectual property and developed in conjunction with Receptors LLC (“Receptors”) of Chaska, Minnesota.
The Company also intends to continue the development of the Rapid Flu Detection system, and other health related products, built on the Company’s core intellectual property. Our HealthID segment also includes the VeriMed system, which uses an implantable passive RFID microchip (the “VeriChip”) that is used in patient identification applications. Each implantable microchip contains a unique verification number that is read when it is scanned by our scanner. In October 2004, the U.S. Food and Drug Administration, or FDA, cleared our VeriMed Health Link system for use in medical applications in the United States.
ID Security Segment
Our ID Security segment includes our Identity Security suite of products, sold through our NationalCreditReport.com brand and our Health Link personal health record. Our NationalCreditReport.com business was acquired in conjunction with our merger with Steel Vault in November 2009. NationalCreditReport.com offers consumers a variety of identity security products and services primarily on a subscription basis. These services help consumers protect themselves against identity theft or fraud and understand and monitor their credit profiles and other personal information, which include credit reports, credit monitoring and credit scores. In the first quarter of 2010, we re-launched our Health Link personal health record (“PHR”). We plan to focus our marketing efforts on partnering with health care providers and exchanges, physician groups, Electronic Medical Record (“EMR”) system vendors, and insurers to use Health Link as a PHR provided to their patients. We will also seek to partner with pharmaceutical companies who wish to communicate with our online community through various forms of value added content and advertising.
The Company continues to focus on its HealthID and ID Security businesses, including the development of the glucose sensing microchip, the Easy Check breath glucose detection system, the iGlucose wireless communication system, the Rapid Flu Detection System, the Health Link PHR, and its operating business in identity security. The Company intends to continue to explore potential strategic transactions with third parties in the healthcare, identification, and animal health sectors.
Recent Developments
In February 2010, we acquired the assets of Easy Check Medical Diagnostics, LLC, including the Easy Check breath glucose detection system and the iGlucose wireless communication system. These products are currently under development.
In February 2010, we successfully completed Phase I development of our rapid virus detection system, a non-invasive, point-of-care test to test patient samples and identify various forms of influenza within minutes. In Phase I development of the virus detection system, which utilizes PositiveID’s exclusively licensed Receptors’ CARA™ (Combinatorial Artificial Receptor Array) platform, the Company successfully achieved proof-of-concept. CARA support and complementary competitor agents were developed to detect the presence of influenza in a model nasal wash matrix. The fluorescently labeled competitor agents compete for binding to the CARA support surface. When competitor agents are displaced from the CARA surface by virus, a fluorescent signal is produced. Model nasal wash samples that contain influenza are distinguished from samples that do not contain influenza.

 

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In March 2010, we filed with the U.S. Patent and Trademark Office a non-provisional patent application for our iGlucose system, currently under development, which uses wireless SMS messaging to automatically communicate a diabetic patient’s blood glucose levels from any data-capable glucose meter to an online database.
In April, 2010, we amended our Development/Master Agreement with Receptors to document the terms of Phase II development of our rapid virus detection system. We agreed to pay Receptors $160,000 and issue it 240,000 shares of restricted common stock, of which Receptors has registration rights, in exchange for completion of Phase II.
On April 28, 2010, we entered into the Preferred Purchase Agreement with Socius Technology, under which Socius Technology is committed to purchase up to $4.2 million in Preferred Stock, and the Purchase Agreement with Socius, under which Socius is committed to purchase up to $4.2 million in common stock, payable in the form of cash or secured promissory note. Under the Purchase Agreement, we have agreed to issue in connection with any Common Tranche, warrants to purchase shares of our common stock equal in dollar amount to 35% of the applicable Common Tranche, at an exercise price per share equal to the Investment Price. For more information on these transactions, see Note 11, “Subsequent Events,” to our condensed consolidated financial statements.
On April 29, 2010, we presented Socius Technology with a Preferred Notice to purchase $2.3 million of Preferred Stock in a Preferred Tranche. Upon the closing of the Preferred Tranche, which occurred on May 4, 2010, we issued 230 shares of Preferred Stock. In connection with the Preferred Notice, we also presented Socius with a notice to purchase $2.3 million of common stock and warrants to purchase 600,746 shares of common stock. We issued 1,716,417 shares of common stock at an Investment Price per share of $1.34, paid in the form a secured promissory note, and a warrant to purchase 600,746 shares of common stock to Socius, at an exercise price equal to the Investment Price of $1.34, which warrant Socius exercised on April 29, 2010 and paid in the form of a secured promissory note.
Results of Operations
With the acquisition of Steel Vault in November 2009, the Company operates in two key segments: HealthID and ID Security. The following are the segment results for the three months ended March 31, 2010 and 2009.
                         
    For the Three Months Ended  
    March 31, 2010  
    HealthID     ID Security     Total  
 
                       
Revenue
  $ 75     $ 598       673  
Cost of sales
    45       171       216  
 
                 
Gross Profit
    30       427       457  
 
                       
Operating expenses:
                       
 
                       
Selling, general and administrative
    2,187       1,593       3,780  
Research and development
    538             538  
 
                 
Total operating expenses
    2,725       1,593       4,318  
 
                 
 
                       
Operating loss
    (2,695 )     (1,166 )     (3,861 )
 
                 
Interest / other income and (expense), net
    12       3       15  
 
                 
Loss from continuing operations
  $ (2,683 )   $ (1,163 )     (3,846 )
 
                 

 

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    For the Three Months Ended  
    March 31, 2009  
    HealthID     ID Security     Total  
 
                       
Revenue
  $ 8     $       8  
Cost of sales
                 
 
                 
Gross Profit
    8             8  
 
                       
Operating expenses:
                       
 
                       
Selling, general and administrative
    1,370             1,370  
Research and development
                 
 
                 
Total operating expenses
    1,370             1,370  
 
                 
 
Operating loss
    (1,362 )           (1,362 )
 
                 
 
                       
Interest / other income and (expense), net
    12             12  
 
                 
Loss from continuing operations
  $ (1,350 )   $       (1,350 )
HealthID Segment
Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
Revenue
Revenue was $75,000 for the three months ended March 31, 2010 compared to $8,000 for the three months ended March 31, 2009. The increase in revenue was attributable primarily to the sale of our new 8 millimeter microchips to a medical device partner.
Gross Profit and Gross Profit Margin
Our cost of sales consists of finished goods and inventory valuation charges. The microchips used in our VeriMed system as well as our new 8 millimeter microchips are purchased as finished goods under the terms of our former agreement with Digital Angel Corporation.
We had a gross profit of $30,000 in 2010 compared to a gross profit of $8,000 in 2009. This increase is attributed to the sale of 8-millimeter microchips to a medical device partner.
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of compensation for employees in executive, sales, marketing and operational functions, including finance and accounting, and corporate development. Other significant costs include depreciation and amortization, professional fees for accounting and legal services, consulting fees and facilities costs.
Selling, general and administrative expense increased by $0.8 million to $2.2 million for the three months ended March 31, 2010 compared to $1.4 million for the three months ended March 31, 2009. This increase was primarily a result of the increase in share-based compensation from $0.2 million in the three months ended March 31, 2009 to $1.1 million in the three months ended March 31, 2010.
Selling, general and administrative expense included depreciation and amortization expense of approximately $8,000 for the three months ended March 31, 2010 and 2009.
Research and Development
Our research and development expense consists primarily of costs associated with various projects, including testing, developing prototypes and related expenses. Research and development expense was $0.5 million for the three months ended March 31, 2010 compared to nil for the three months ended March 31, 2009. Our research and development costs represent payments to our project partner and acquisition of in process research and development.
ID Security Segment
The ID Security segment reflects the results of National Credit Report.com from the acquisition of Steel Vault on November 10, 2009.
Three Months Ended March 31, 2010

 

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Revenue
Revenue of $0.6 million for the three months ended March 31, 2010 resulted from sales of our identity security products through our National Credit Report.com subsidiary. At March 31, 2010, the Company had approximately 11,000 subscribers for its credit monitoring services compared to approximately 20,000 subscribers at November 10, 2009, the date of the Steel Vault Merger. Annualizing the revenue would not be indicative of the results of the Company due to the upward trend in subscribers.
Gross Profit and Gross Profit Margin
Cost of sales consists primarily of the costs related to purchasing the data, reporting and monitoring services from our supplier in order to provide services to our customers.
We had a gross profit of $0.4 million for the three months ended 2010 from our identity security products through National Credit Report.com. Annualizing gross profit would not be indicative of trend or pattern due to the Company’s upward trend and growth in subscribers.
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of compensation for employees in sales, marketing and operational functions, including finance and accounting. Other significant costs include professional fees for accounting and legal services, and consulting fees.
Selling, general and administrative expense for the three months ended March 31, 2010 was $1.6 million. The Company expects the trend of selling, general and administrative expenses to be similar on an annualized basis.
Liquidity and Capital Resources
As of March 31, 2010, unrestricted cash totaled $4.9 million compared to unrestricted cash of approximately $6.4 million at December 31, 2009.
Cash Flows Used in Operating Activities
Net cash used in operating activities totaled $1.8 million and $1.0 million during the three months ended March 31, 2010 and 2009, respectively. For each of the periods presented, cash was used primarily to fund operating losses, and payments of accounts payable and accrued expenses.
Cash Flows from Investing Activities
Investing activities used cash of $19,000 and $4,000 during the three months ended March 31, 2010 and 2009, respectively, which was used to purchase equipment.
Cash Flows from Financing Activities
Financing activities provided cash of $0.3 million and nil during the three months ended March 31, 2010 and 2009, respectively. In 2010, cash was provided by issuance of common shares from stock option exercises.
Preferred Stock Purchase Agreement
On April 28, 2010, we entered into the Preferred Purchase Agreement with Socius Technology under which Socius Technology is committed to purchase up to $4.2 million in shares of our Preferred Stock in one or more Preferred Tranches, at $10,000 per share of Preferred Stock. Under the terms of the Preferred Purchase Agreement, from time to time and at our sole discretion, we may present Socius Technology with a Preferred Notice. Socius Technology is obligated to purchase such Preferred Stock on the third trading day after the Preferred Notice date, subject to satisfaction of the Closing Conditions.
Stock Purchase Agreement
On April 28, 2010, we entered into the Purchase Agreement with Socius under which Socius is committed to purchase in connection with any Preferred Tranche, the up to that number of shares of common stock equal in dollar amount to the Common Tranche, at a per share price equal to the Investment Price. Under the Purchase Agreement, we also agreed to issue in connection with any Common Tranche, two-year warrants to purchase shares of common stock equal in dollar amount to 35% of the applicable Common Tranche, at an exercise price per share equal to the Investment Price.

 

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Socius may pay the Investment Price for the common stock, at Socius’ option, in cash or a secured promissory note. Socius may pay the warrant exercise price, at Socius’ option, in cash, a secured promissory note, or, if applicable, by cashless exercise. The promissory note bears interest at 2.0% per year calculated on a simple interest basis. The entire principal balance and interest thereon is due and payable on the fourth anniversary of the date of the promissory note, but no payments are due so long as we are in default under the Preferred Purchase Agreement or the warrants or if there are any shares of Preferred Stock issued or outstanding. The promissory note is secured by the borrower’s right, title and interest in all outstanding shares of our common stock and other securities with a fair market value equal to the principal amount of the promissory note. Our right to deliver a tranche notice to Socius pursuant to the Purchase Agreement is subject to the Closing Conditions and also that no purchase would result in Socius and its affiliates beneficially owning more than 9.99% of the common stock. Unless we obtain stockholder approval or Socius obtains an opinion of counsel that stockholder approval is not required, Socius may not exercise a warrant if, as a result of such exercise, the aggregate number of shares of common stock issued upon exercise of all warrants it holds plus the aggregate number of shares of common stock issued under the Purchase Agreement would exceed 19.99% of our common stock outstanding. If at any time, upon the exercise of all warrants issued to Socius, Socius holds more than 19.99% of our outstanding common stock, we will be required to obtain stockholder approval of the transactions with Socius.
Tranche Draw Down
On April 29, 2010, we presented Socius Technology with a Preferred Notice to purchase $2.3 million of Preferred Stock in a Preferred Tranche. Upon the closing of the Preferred Tranche, which occurred on May 4, 2010, we issued 230 shares of Preferred Stock. In connection with the Preferred Notice, we also presented Socius with a notice to purchase $2.3 million of common stock and warrants to purchase 600,746 shares of common stock. We issued 1,716,417 shares of common stock at an Investment Price per share of $1.34, paid in the form a secured promissory note, and a warrant to purchase 600,746 shares of common stock to Socius, at an exercise price equal to the Investment Price of $1.34, which warrant Socius exercised on April 29, 2010 and paid in the form of a secured promissory note.
Financial Condition
As of March 31, 2010, we had working capital of approximately $3.5 million and an accumulated deficit of $57.6 million compared to a working capital of approximately $5.2 million and an accumulated deficit of approximately $53.7 million as of December 31, 2009. The decrease in working capital was primarily due to operating losses, described above.
We believe that with the cash we have on hand, we will have sufficient funds available to cover our cash requirements through the next twelve months.
Impact of Recently Issued Accounting Standards
In January 2010, the Financial Accounting Standard Board (“FASB”) issued ASU 2010-06, Improving Disclosures about Fair Value Measurements. The ASU requires disclosing the amounts of significant transfers in and out of Level 1 and 2 fair value measurements and to describe the reasons for the transfers. The disclosures are effective for reporting periods beginning after December 15, 2009. Additionally, disclosures of the gross purchases, sales, issuances and settlements activity in Level 3 fair value measurements will be required for fiscal years beginning after December 15, 2010.
In January 2010, the FASB issued Accounting Standards Update 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash (A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic 505 clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a limit on the amount of cash that will be distributed is not a stock dividend for purposes of applying Topics 505 and 260. ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009, and would be applied on a retrospective basis. The Company does not expect the provisions of ASU 2010-01 to have a material effect on the financial position, results of operations or cash flows of the Company.

 

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Item 3.   Quantitative and Qualitative Disclosures About Market Risk.
As a “Smaller Reporting Company,” we are not required to provide the information required by this item.
Item 4.   Controls and Procedures.
Disclosure Controls and Procedures
Evaluation of Disclosure Controls . We evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of March 31, 2010. This evaluation (the “disclosure controls evaluation”) was done under the supervision and with the participation of management, including our chief executive officer (“CEO”) and chief financial officer (“CFO”). Rules adopted by the SEC require that in this section of our Quarterly Report on Form 10-Q we present the conclusions of the CEO and CFO about the effectiveness of our disclosure controls and procedures as of March 31, 2010 based on the disclosure controls evaluation.
Objective of Controls. Our disclosure controls and procedures are designed so that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives, and management necessarily is required to use its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Conclusion . Based upon the disclosure controls evaluation, our CEO and CFO have concluded that, as of March 31, 2010, our disclosure controls and procedures were effective to provide reasonable assurance that the foregoing objectives are achieved.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act that occurred during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION
Item 1.   Legal Proceedings.
The information set forth in Note 7 to the Condensed Financial Statements in Part I, Item I of this Form 10-Q is incorporated herein by reference.
Item 1A.   Risk Factors.
Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 includes a detailed discussion of other risk factors that could materially affect our business, financial condition or future results.
There can be no assurance that we will receive any proceeds from the sale of the shares or the exercise of warrants since both can be paid for at Socius’ option by a secured promissory note.
Under the terms of the Purchase Agreement, Socius may pay for the shares and the exercise of the warrants by issuing to us a secured promissory note. Therefore, it is possible that we will not receive any proceeds from the sale of the shares or exercise of the warrants. Further, we have the right to redeem the Preferred Stock issued to Socius Technology by offset of the secured promissory notes we receive from Socius as payment for the shares issued under the Purchase Agreement or upon exercise of the warrants. Therefore, it is possible that we will not receive cash proceeds upon maturity of the secured promissory notes that we receive from Socius.
Sales of shares to Socius pursuant to the Purchase Agreement and the resale of such shares by Socius may result in declines in the price of our common stock .
The shares of common stock Socius purchases under the Purchase Agreement are freely tradable and Socius may promptly sell the shares we issue to them under the Purchase Agreement in the public markets. Such sales, and the potential for such sales, could cause the market price of our shares to decline significantly. To the extent of any such decline, any subsequent draw downs that we request under the Purchase Agreement would require the issuance of a greater number of shares to Socius. This may result in significant dilution to our stockholders.
Future sales of common stock by our existing stockholders may cause our stock price to fall .
The market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market, or the perception that these sales could occur. These sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate. As of April 30, 2010, we had 26,105,071 shares of common stock outstanding (which includes 2,955,160 unvested shares of restricted stock granted to our employees), and we had warrants to purchase 454,000 shares of common stock and options to purchase 3,606,491 shares of common stock outstanding. All of the shares of common stock issuable upon exercise of our outstanding warrants and any vested options will be freely tradable without restriction under the federal securities laws unless purchased by our affiliates. Scott R. Silverman, our chairman and chief executive officer, William J. Caragol, our president and chief financial officer, R & R Consulting Partners, LLC, a holding company owned and controlled by Mr. Silverman, and Blue Moon Energy Partners, LLC, a company for which Mr. Silverman is a manager and controls a member (i.e., R & R Consulting Partners, LLC) and for which Mr. Caragol is a manager and member, have entered into lock-up agreements pursuant to which they cannot sell any of our securities for thirty days following the date we provide a tranche notice to Socius.
Our stockholders may be diluted by our future issuance of common stock to Socius and the exercise of warrants to purchase common stock.
Pursuant to the Purchase Agreement, we may sell to Socius up to an additional $1.9 million of our shares of common stock at the Investment Price. In addition, we may issue to Socius warrants to purchase up to an additional $665,000 shares of our common stock at an exercise price equal to the Investment Price. The number of shares of our common stock issuable upon exercise of warrants issued to Socius, and therefore the dilution of existing common stockholders, is subject to increase as a result of certain sales of our securities that trigger the antidilution provisions of those warrants at a price below the applicable exercise price of those warrants. Future exercises of those warrants and future issuance of common stock to Socius pursuant to the Purchase Agreement may dilute the ownership interests of our current stockholders.

 

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Our ability to raise funds under the Preferred Purchase Agreement will depend on several factors, including the trading volume for our common stock .
In connection with any Preferred Tranche, Socius is required to purchase shares of common stock equal in dollar amount to 100% of the applicable Preferred Tranche amount. Under the Purchase Agreement, Socius may not make any advances which would require Socius to purchase shares of common stock that would result in Socius owning more than 9.99% of our outstanding shares of common stock. Our ability to sell additional shares of common stock to Socius and raise funds under the Preferred Purchase Agreement will depend on Socius’ ability to sell shares of common stock previously purchased under the Purchase Agreement. This will depend, among other factors, on the trading volume for our shares on the NASDAQ Capital Market and prevailing conditions in the capital markets generally.
We do not anticipate declaring any cash dividends on our common stock .
In July 2008 we declared, and in August 2008 we paid, a special cash dividend of $15.8 million on our capital stock. Any future determination with respect to the payment of dividends will be at the discretion of our board of directors 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 of directors may deem relevant. In addition, our convertible preferred stock purchase agreement with Optimus Capital Partners, LLC prohibits the payment of cash dividends on any of our capital stock except shares of Series A Preferred Stock while any shares of Series A Preferred Stock are outstanding.
Item 2.   Unregistered Sale of Equity Securities .
During the three months ended March 31, 2010, we sold 350,000 shares of our common stock that were not registered under the Securities Act of 1933, as amended.
On February 11, 2010, we issued 300,000 shares of our common stock, valued at approximately $351,000, to Easy Check Diagnostics, LLC in connection with the acquisition of the assets of Easy Check Medical Diagnostics, LLC. Additional payment in the form of shares (maximum 200,000 shares) and product royalties may be paid in the future based on successful patent grants and product or license revenues.
On March 16, 2010, we authorized the grant of 50,000 shares of our common stock to Receptors, LLC, in connection with the execution of an amended and restated license agreement.
The shares of common stock described in this Item 2 were issued without registration in reliance upon the exemption provided, among others, by Section 4(2) of the Securities Act of 1933, as amended, as a transaction not involving any public offering.
Item 4.   Other Information.
On November 12, 2009, our Compensation Committee approved a 2010 executive compensation arrangement for Messrs. Silverman and Caragol whereby beginning January 1, 2010, Mr. Silverman and Mr. Caragol received a base salary of $375,000 and $225,000, respectively. Additionally, the Compensation Committee has the authority to approve a discretionary bonus for 2010, a portion of which is guaranteed, to each of Mr. Silverman and Mr. Caragol based on the following factors: development of the rapid virus sensor project, development of the glucose-sensing microchip project, the financial performance of the business of our wholly-owned subsidiary, National Credit Report.com, strategic acquisitions, the overall financial condition/health of the business, and such other factors as the Compensation Committee deems appropriate in light of any acquisitions or changes in the business. Mr. Silverman may earn a bonus between $200,000 and $600,000, and Mr. Caragol may earn a bonus between $200,000 and $450,000. Mr. Silverman and Mr. Caragol are entitled to Company-paid health insurance, non-allocable expenses of $45,000 and $20,000, respectively, and each are entitled to an automobile allowance and other automobile expenses, including insurance, gasoline and maintenance costs. On May 4, 2010, our Compensation Committee approved a change to the above-referenced compensation arrangement and in lieu of (i) cash salary for the remainder of 2010 for Messrs. Silverman and Caragol and (ii) the minimum cash bonus obligation to Messrs. Silverman and Caragol pursuant to the bonus structure set forth above, it approved the issuance of 675,000 shares of the Company’s restricted stock to Mr. Silverman and 525,000 shares of the Company’s restricted stock to Mr. Caragol. These restricted shares were issued under our 2009 Stock Incentive Plan and will vest according to the following schedule: (i) 50% vest on January 1, 2011; and (ii) 50% vest on January 1, 2012. Mr. Silverman’s and Mr. Caragol’s rights and interests in the unvested portion of the restricted stock are subject to forfeiture in the event they resign prior to January 1, 2012 or are terminated for cause prior to January 1, 2012, with said cause being defined as a conviction of a felony or such person being prevented from providing services to us as a result of such person’s violation of any law, regulation and/or rule.
Item 5.   Exhibits.
We have listed the exhibits by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K on the Exhibit list attached to this report.

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  POSITIVEID CORPORATION
(Registrant)
 
 
Date: May 6, 2010  By:   /s/ William J. Caragol    
    William J. Caragol   
    President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) 
 

 

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Exhibit Index
         
Exhibit    
Number   Description
  3.1 *  
Second Amended and Restated Certificate of Incorporation of PositiveID Corporation filed with the Secretary of State of Delaware on December 18, 2006, as amended on November 10, 2009
  3.2    
Amended and Restated By-laws of PositiveID Corporation adopted as of December 12, 2005, as amended on March 16, 2010 (1)
  4.1    
Form of Specimen Common Stock Certificate (1)
  10.1 *  
First Amendment to Development/Master Agreement, dated April 22, 2010, between PositiveID Corporation and Receptors LLC
  10.2    
Amended and Restated License Agreement, dated February 26, 2010, between PositiveID Corporation and Receptors LLC (1)
  10.3    
Amended and Restated Development/Master Agreement, dated February 26, 2010, between PositiveID Corporation and Receptors LLC (1)
  10.4    
PositiveID Animal Health Corporation 2010 Flexible Stock Plan (1)
  10.5    
Form of Restricted Stock Award Agreement under the PositiveID Animal Health Corporation 2010 Flexible Stock Plan (1)
  10.6    
Form of Non-Qualified Stock Option Award Agreement under PositiveID Animal Health Corporation 2010 Flexible Stock Plan (1)
  10.7    
Preferred Stock Purchase Agreement, dated April 28, 2010, between PositiveID Corporation and Socius Capital Group, LLC (2)
  10.8    
Stock Purchase Agreement, dated April 28, 2010, between PositiveID Corporation and Socius CG II, Ltd. (2)
  31.1 *  
Certification by Chief Executive Officer, pursuant to Exchange Act Rules 13A-14(a) and 15d-14(a)
  31.2 *  
Certification by Chief Financial Officer, pursuant to Exchange Act Rules 13A-14(a) and 15d-14(a)
  32.1 *  
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
*   Filed herewith.
 
(1)   Incorporated by reference to the Form 10-K previously filed by PositiveID Corporation on March 19, 2010.
 
(2)   Incorporated by reference to the Form 8-K previously filed by PositiveID Corporation on April 29, 2010.

 

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Exhibit 3.1

CERTIFICATE OF AMENDMENT
OF
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
VERICHIP CORPORATION

It is hereby certified that:

1. The name of the corporation (hereinafter called the “Corporation”) is VeriChip Corporation.

2. The Certificate of Incorporation of the Corporation is hereby amended by changing the Article numbered “I” so that, as amended, said Article shall be and read as follows:

ARTICLE I
NAME

The name of the corporation is PositiveID Corporation.

3. The Certificate of Incorporation of the Corporation is hereby amended by changing the first paragraph of the Article numbered “IV” so that, as amended, said paragraph of said Article shall be and read as follows:  

ARTICLE IV
CAPITALIZATION
 

The total number of shares of all classes of capital stock which the Corporation is authorized to issue is 75,000,000 shares, consisting of 70,000,000 shares of common stock, par value $0.01 per share (the “ Common Stock ”) and 5,000,000 shares of preferred stock, par value $0.001 per shares (the “ Preferred Stock ”).

4.  Pursuant to a resolution of its Board of Directors, a meeting of stockholders of the Corporation was duly called and held, on November 10, 2009 upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendments.

5.  The foregoing amendments were duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

NOW, THEREFORE, the Corporation has caused this Certificate to be signed this 10th day of November , 2009.

By: /s/ William J. Caragol                                    
Name: William J. Caragol
Title: President and Chief Financial Officer

 


 

SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
VERICHIP CORPORATION
     VeriChip Corporation, a corporation organized and existing under the laws of the State of Delaware (the “ Corporation ”), DOES HEREBY CERTIFY AS FOLLOWS:
     1. The name of the Corporation is “VeriChip Corporation.” The Corporation was originally incorporated under the name “Surgical Identification Services, Inc.,” and the original certificate of incorporation was filed with the Secretary of State of the State of Delaware on November 29, 2001.
     2. An Amended and Restated Certificate of Incorporation (the “ Amended and Restated Certificate of Incorporation ”) was filed with the Secretary of State of the State of Delaware on December 20, 2005.
     2. This Second Amended and Restated Certificate of Incorporation (“ Certificate ”) has been duly adopted by the Board of Directors and has been approved and adopted by the stockholders of the Corporation, in accordance with Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware.
     3. This Certificate restates, integrates and further amends the provisions of the Amended and Restated Certificate of Incorporation of the Corporation.
     4. The text of the Amended and Restated Certificate of Incorporation is hereby restated and amended to read in its entirety as follows:
ARTICLE I
NAME
     The name of the corporation is VeriChip Corporation.
ARTICLE II
PURPOSE
     The purpose of the Corporation is to engage in any lawful acts or activities for which corporations may be organized under the General Corporation Law of the State of Delaware (the DGCL ) and to possess and exercise all of the powers and privileges granted by such law and any other law of the State of Delaware.

 


 

ARTICLE III
REGISTERED AGENT
     The street address of the registered office of the Corporation in the State of Delaware is 2711 Centerville Road, Suite 400, in the City of Wilmington, County of New Castle, 19808, and the name of the Corporation’s registered agent at such address is The Company Corporation.
ARTICLE IV
CAPITALIZATION
     Section 4.1 Authorized Capital Stock .
     The total number of shares of all classes of capital stock which the Corporation is authorized to issue is 45,000,000 shares, consisting of 40,000,000 shares of common stock, par value $0.01 per share (the Common Stock ), and 5,000,000 shares of preferred stock, par value $0.001 per share (the Preferred Stock ).
     No holder of stock of any class or series of the Corporation, whether now or hereafter authorized or issued, shall be entitled, as a matter of right, to subscribe for or purchase any part of any new or additional issue of stock of any class or series whatsoever, or of any securities convertible into stock of any class or series, or to which are attached or with which are issued warrants or rights to purchase any such stock, whether now or hereafter authorized, issued or sold, whether issued for moneys, property or services, or by way of dividend or otherwise, or any right or subscription to any thereof, other than such, if any, as the Board of Directors in its discretion may from time to time fix, pursuant to authority hereby conferred upon it; and any shares of stock or convertible obligations with warrants or rights to purchase any such stock, which the Board of Directors may determine to offer for subscription, may be sold without being first offered to any of the holders of the stock of the Corporation of any class or classes or series or may, as the Board may determine, be offered to holders of any class or classes or series of stock exclusively or to the holders of all classes or series of stock, and if offered to more than one class or series of stock, in such proportions as between such classes or series of stock as the Board of Directors, in its discretion, may determine.
     Effective immediately upon the date of filing of this Certificate with the Delaware Secretary of State, every three (3) outstanding shares of Common Stock of the Corporation will be combined into and automatically become one (1) outstanding share of Common Stock of the Corporation and the authorized shares of the Corporation shall remain as set forth in this Certificate. Any fractional shares that occurs as a result of the foregoing shall be rounded up or down to the nearest whole number.

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     Section 4.2 Preferred Stock .
     (a) The Preferred Stock may be issued from time to time in one or more classes or series. The Board of Directors (the “ Board ”) is hereby expressly authorized to provide for the issuance of shares of Preferred Stock in one or more classes or series and to establish from time to time the number of shares to be included in each such class or series and to fix the designations, powers, preferences and relative, participating, optional and other special rights, if any, of each such class or series and the qualifications, limitations and restrictions thereof, as shall be stated in the resolution(s) adopted by the Board providing for the issuance of such class or series and included in a certificate of designations (a “ Preferred Stock Designation ”) filed pursuant to the DGCL. Without limiting the generality of the foregoing, the resolution or resolutions providing for the establishment of any class or series of Preferred Stock may, to the extent permitted by law, provide that such class or series shall be superior to, rank equally with or be junior to the Preferred Stock of any other class or series. Except as otherwise expressly provided in the resolution or resolutions providing for the establishment of any class or series of Preferred Stock, no vote of the holders of shares of Preferred Stock or Common Stock shall be a prerequisite to the issuance of any shares of any class or series of the Preferred Stock authorized by and complying with the conditions of this Certificate.
     (b) The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the outstanding shares of Common Stock, without a vote of the holders of the Preferred Stock, or any class or series thereof, unless a vote of any such holders of Preferred Stock is required pursuant to another provision of this Certificate (including any Preferred Stock Designation).
     Section 4.3 Common Stock .
     (a) The holders of shares of Common Stock shall be entitled to one vote for each such share of Common Stock held on each matter properly submitted to the stockholders on which the holders of shares of Common Stock are entitled to vote. Except as otherwise required by law or this Certificate (including any Preferred Stock Designation), at any annual or special meeting of the stockholders the holders of outstanding shares of Common Stock shall have the exclusive right to vote for the election of directors and on all other matters properly submitted to a vote of the stockholders. Notwithstanding the foregoing, except as otherwise required by law or this Certificate (including a Preferred Stock Designation), holders of Common Stock shall not be entitled to vote on any amendment to this Certificate (including any amendment to any Preferred Stock Designation) that relates solely to the terms of one or more outstanding class or series of Preferred Stock if the holders of such affected class or series are entitled, either separately or together with the holders of one or more other such class or series, to vote thereon pursuant to this Certificate (including any Preferred Stock Designation).
     (b) Subject to the rights of the holders of Preferred Stock, the holders of shares of Common Stock shall be entitled to receive such dividends and other distributions (payable in cash, property or capital stock of the Corporation) when, as and if declared thereon by the Board from time to time out of any assets or funds of the Corporation legally available therefor and shall share equally on a per share basis in such dividends and distributions.

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     (c) In the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Corporation, and after payment or provision for payment of the debts and other liabilities of the Corporation, and subject to the rights of the holders of Preferred Stock in respect thereof, the holders of shares of Common Stock shall be entitled to receive all the remaining assets of the Corporation available for distribution to its stockholders, ratably in proportion to the number of shares of Common Stock held by them.
ARTICLE V
BOARD OF DIRECTORS
     Section 5.1 Board Powers .
     The business and affairs of the Corporation shall be managed by, or under the direction of, the Board. In addition to the powers and authority expressly conferred upon the Board by statute, this Certificate or the By-Laws (“ By-Laws ”) of the Corporation, the Board is hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the DGCL, this Certificate and any By-Laws; provided, however , that no By-Laws hereafter adopted by the stockholders shall invalidate any prior act of the Board that would have been valid if such By-Laws had not been adopted.
     Section 5.2 Number, Election and Term .
     (a) The number of directors of the Corporation, other than those who may be elected by the holders of one or more series of Preferred Stock voting separately by class or series, shall be fixed from time to time exclusively by the Board pursuant to a resolution adopted by a majority of the Whole Board. For purposes of this Certificate, “ Whole Board ” shall mean the total number of directors the Corporation would have if there were no vacancies.
     (b) Subject to Section 5.5 , a director shall hold office until the annual meeting for the year in which his or her term expires and until his or her successor has been elected and qualified, subject, however, to such director’s earlier death, resignation, retirement, disqualification or removal.
     (c) Unless and except to the extent that the By-Laws shall so require, the election of directors need not be by written ballot.
     (d) There shall be no cumulative voting in the election of directors.
     Section 5.3 Newly Created Directorships and Vacancies .
     Subject to Section 5.5 , newly created directorships resulting from an increase in the number of directors and any vacancies on the Board resulting from death, resignation, retirement, disqualification, removal or other cause may be filled solely by a majority vote of the directors then in office, even if less than a quorum, or by a sole remaining director (and not by stockholders), and any director so chosen shall hold office for the remainder of the term to which the new directorship was added or in which the vacancy occurred and until his or her successor has been elected and qualified, subject, however, to such director’s earlier death, resignation, retirement, disqualification or removal. No decrease in the number of directors constituting the Board shall shorten the term of any incumbent director.

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     Section 5.4 Removal .
     Subject to Section 5.5 , any or all of the directors may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Corporation then entitled to vote generally in the election of directors, voting together as a single class.
     Section 5.5 Preferred Stock — Directors .
     Notwithstanding any other provision of this Article V , and except as otherwise required by law, whenever the holders of one or more series of Preferred Stock shall have the right, voting separately by class or series, to elect one or more directors, the term of office, the filling of vacancies, the removal from office and other features of such directorships shall be governed by the terms of such series of Preferred Stock as set forth in this Certificate (including any Preferred Stock Designation).
ARTICLE VI
BY-LAWS
     In furtherance and not in limitation of the powers conferred upon it by law, the Board is expressly authorized and empowered to adopt, amend, alter or repeal the By-Laws. The affirmative vote of a majority of the Whole Board shall be required to adopt, amend, alter or repeal the By-Laws. The stockholders shall, to the extent such power is at the time conferred on them by applicable law, also have the power, by the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Corporation then entitled to vote generally in the election of directors, voting together as a single class, to make, alter, amend or repeal any By-Law of the Corporation.
ARTICLE VII
MEETINGS OF STOCKHOLDERS
     Section 7.1 No Action by Written Consent .
     Except as otherwise required by the specific terms of any class or series of Preferred Stock as set forth in the Preferred Stock Designation with respect to such class or series, any action required or permitted to be taken at any annual or special meeting of stockholders may be taken only upon the vote of stockholders at an annual or special meeting duly noticed and called in accordance with the DGCL as amended from time to time, and may not be taken by written consent of stockholders without a meeting.

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     Section 7.2 Meetings .
     Except as otherwise required by law or the terms of any one or more series of Preferred Stock, special meetings of stockholders of the Corporation may be called only by the Chairman of the Board, the Chief Executive Officer, the President, or the Board pursuant to a resolution adopted by a majority of the Whole Board, and the ability of the stockholders to call a special meeting is hereby specifically denied.
     Section 7.3 Advance Notice .
     Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the By-Laws.
     Section 7.4 Location .
     Meetings of stockholders may be held within or outside the State of Delaware, as the By-Laws may provide. The books of the Corporation may be kept (subject to any provision contained in the statues) outside of the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the By-Laws.
ARTICLE VIII
LIMITED LIABILITY; INDEMNIFICATION
     Section 8.1 Limitation of Personal Liability .
     No person who is or was a director of the Corporation shall be personally liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted by the DGCL as the same exists or hereafter may be amended. If the DGCL is hereafter amended to authorize corporate action further limiting or eliminating the liability of directors, then the liability of a director to the Corporation or its stockholders shall be limited or eliminated to the fullest extent permitted by the DGCL, as so amended. Any repeal or amendment of this Section 8.1 by the stockholders of the Corporation or by changes in law, or the adoption of any other provision of this Certificate inconsistent with this Section 8.1 will, unless otherwise required by law, be prospective only (except to the extent such amendment or change in law permits the Corporation to further limit or eliminate the liability of directors) and shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or amendment or adoption of such inconsistent provision with respect to acts or omissions occurring prior to such repeal or amendment or adoption of such inconsistent provision.

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     Section 8.2 Indemnification .
     (a) Each person who is or was made a party or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “ proceeding ”) by reason of the fact that he or she is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter a “ Covered Person ”), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent, or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized or permitted by applicable law, as the same exists or may hereafter be amended, against all expense, liability and loss (including, without limitation, attorneys’ fees, judgments, fines, ERISA excise taxes and penalties and amounts paid in settlement) reasonably incurred or suffered by such Covered Person in connection with such proceeding, and such right to indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided , however , that, except for proceedings to enforce rights to indemnification, the Corporation shall indemnify a Covered Person in connection with a proceeding (or part thereof) initiated by such Covered Person only if such proceeding (or part thereof) was authorized by the Board. The right to indemnification and advancement of expenses conferred by this Section 8.2 shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending or otherwise participating in any such proceeding in advance of its final disposition to the fullest extent authorized by the DGCL as the same exists or is hereafter amended.
     (b) The rights conferred on any Covered Person by this Section 8.2 shall not be exclusive of any other rights which any Covered Person may have or hereafter acquire under law, this Certificate, the By-Laws, an agreement, vote of stockholders or disinterested directors, or otherwise.
     (c) Any repeal or amendment of this Section 8.2 by the stockholders of the Corporation or by changes in law, or the adoption of any other provision of this Certificate inconsistent with this Section 8.2 , will, unless otherwise required by law, be prospective only (except to the extent such amendment or change in law permits the Corporation to provide broader indemnification rights on a retroactive basis than permitted prior thereto), and will not in any way diminish or adversely affect any right or protection existing at the time of such repeal or amendment or adoption of such inconsistent provision in respect of any act or omission occurring prior to such repeal or amendment or adoption of such inconsistent provision.
     (d) This Section 8.2 shall not limit the right of the Corporation, to the extent and in the manner authorized or permitted by law, to indemnify and to advance expenses to persons other than Covered Persons, provided, however, that if the DGCL requires or permits the payment of such expenses incurred by a Covered Person as set forth herein in advance of the final disposition of a proceeding, such payment shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director of officer is not entitled to be indemnified under this Section or otherwise.
     (e) The Corporation may, by action of its Board, provide indemnification and the advancement of expenses to such of the officers, employees and agents of the Corporation and such other persons serving at the request of the Corporation as officers, employees and agents of another corporation, partnership, joint venture, limited liability company, trust or other enterprise to such extent as is permitted by the laws of the State of Delaware as the same exists or is hereafter amended and the Board shall determine to be appropriate.

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     (f) The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, limited liability company, trust or other enterprise against any expense, liability or loss incurred by such person in any such capacity or arising out of his status as such, whether or not the Corporation would have the power to indemnify such person against such liability under Delaware law.
     (g) The rights and authority conferred in this Article VIII shall not be exclusive of any other right which any person may otherwise have or hereafter acquire.
ARTICLE IX
AMENDMENT OF CERTIFICATE OF INCORPORATION
     The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in this Certificate (including any Preferred Stock Designation), and any other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by this Certificate, the By-Laws or the DGCL; and, except as set forth in Article VIII , all rights, preferences and privileges herein conferred upon stockholders, directors or any other persons by and pursuant to this Certificate in its present form or as hereafter amended are granted subject to the right reserved in this Article; provided , however , that, notwithstanding any other provision of this Certificate, and in addition to any other vote that may be required by law or any Preferred Stock Designation, the affirmative vote of the holders of a majority of the voting power of all then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend, alter or repeal, or adopt any provision as part of this Certificate.
ARTICLE X
SECTION 203 OF THE DGCL
     The Corporation elects not to be governed by Section 203 of the DGCL.

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ARTICLE XII
SECTION 102(B)(2) OF THE DGCL
     Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this corporation under §291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under §279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation.
     IN WITNESS WHEREOF, VeriChip Corporation has caused this Certificate to be duly executed in its name and on its behalf by its Chief Executive Officer this 18th day of December, 2006.
         
  VERICHIP CORPORATION
 
 
  By:   /s/ Scott R. Silverman    
    Scott R. Silverman, Chief Executive Officer   
       
 

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VERICHIP CORPORATION
CERTIFICATE OF DESIGNATIONS OF PREFERENCES,
RIGHTS AND LIMITATIONS
OF
SERIES A PREFERRED STOCK
The undersigned, Scott R. Silverman and William J. Caragol hereby certify that:
     1. They are the Chief Executive Officer and Acting Chief Financial Officer, respectively, of VeriChip Corporation, a Delaware corporation (the “ Corporation ”).
     2. The Corporation is authorized to issue 5,000,000 shares of preferred stock, none of which shares are issued and outstanding.
     3. The following resolutions were duly adopted by the Board of Directors:
     WHEREAS, the Certificate of Incorporation of the Corporation provides for a class of its authorized stock known as preferred stock, comprised of 5,000,000 shares, $0.001 par value per share (the “ Preferred Stock ”), issuable from time to time in one or more series;
     WHEREAS, the Board of Directors of the Corporation is authorized to fix the dividend rights, dividend rate, voting rights, conversion rights, rights and terms of redemption and liquidation preferences of any wholly unissued series of Preferred Stock and the number of shares constituting any Series A and the designation thereof, of any of them; and
     WHEREAS, it is the desire of the Board of Directors of the Corporation, pursuant to its authority as aforesaid, to fix the rights, preferences, restrictions and other matters relating to a series of Preferred Stock, which shall consist of up to 2,000 shares of the Preferred Stock which the Corporation has the authority to issue, as follows:
     NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby provide for the issuance of a series of Preferred Stock for cash or exchange of other securities, rights or property and does hereby fix and determine the rights, preferences, restrictions and other matters relating to such series of Preferred Stock as follows:
TERMS OF PREFERRED STOCK
     1.  Designation, Amount and Par Value . The series of Preferred Stock shall be designated as the Corporation’s Series A Preferred Stock (the “ Series A Preferred Stock ”) and the number of shares so designated shall be 2,000, which shall not be subject to increase without any consent of the holders of the Series A Preferred Stock (each a “ Holder ” and collectively, the “ Holders ”) as required by applicable law. Each share of Series A Preferred Stock shall have a par value of $0.001 per share.
     2.  Ranking and Voting . The Series A Preferred Stock shall, with respect to rights upon liquidation, winding-up or dissolution, rank:

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          a. senior to the Corporation’s common stock, par value $0.01 per share (“ Common Stock ”), and any other class or series of Preferred Stock of the Corporation (collectively, together with any warrants, rights, calls or options exercisable for or convertible into such Preferred Stock, the “ Junior Shares ”); and
          b. junior to all existing and future indebtedness of the Corporation.
     Except as required by applicable law, the holders of shares of Series A Preferred Stock will have no right to vote on any matters, questions or proceedings of this Corporation including, without limitation, the election of directors.
     3.  Dividends and Other Distributions . Commencing on the first anniversary of the date of the issuance of any such shares of Series A Preferred Stock (each respectively an “ Issuance Date ”), Holders of Series A Preferred Stock shall be entitled to receive dividends on each outstanding share of Series A Preferred Stock (“ Dividends ”), which shall accrue in shares of Series A Preferred Stock at a rate equal to 10.0% per annum from the Issuance Date. Accrued Dividends shall be payable annually on the anniversary of the Issuance Date. No dividend shall be payable with respect to shares of Series A Preferred Stock that are redeemed for cash or converted into shares of Common Stock prior to the first anniversary of the Issuance Date with respect to such shares.
          a. Any calculation of the amount of such Dividends payable pursuant to the provisions of this Section 3 shall be made based on a 365-day year and on the number of days actually elapsed during the applicable calendar quarter, compounded annually.
          b. So long as any shares of Series A Preferred Stock are outstanding, no dividends or other distributions will be paid, declared or set apart with respect to any Junior Shares. The Common Stock shall not be redeemed while the Series A Preferred Stock is outstanding.
     4.  Conversion .
          a. Mechanics of Conversion.
               (i) Subject to the terms and conditions hereof, one or more of the Series A Preferred Stock may be converted into shares of Common Stock, at any time or times on or after (but not before) the six-month anniversary of the issuance date of such Series A Preferred Stock, at the option of Holder or the Company, by (i) if at the option of Holder, delivery of a written notice to the Company, in the form attached hereto as Exhibit A-1 (the “ Holder Conversion Notice ”), of the Holder’s election to convert the Series A Preferred Stock, or (ii) if at the option of the Company, delivery of a written notice to Holder, in the form attached hereto as Exhibit A-2 (the “ Company Conversion Notice ” and, with the Holder Conversion Notice, each a “ Conversion Notice ”), of the Company’s election to convert the Series A Preferred Stock. On the same Trading Day on which the Company has received the Holder Conversion Notice or issued the Company Conversion Notice (as the case may be) by 10:30 a.m. Eastern time, or the following Trading Day if received after such time or on a non-Trading Day, the Company shall transmit by facsimile or electronic mail an acknowledgment of confirmation of receipt of the Holder Conversion Notice or issuance of the Company Conversion Notice to the Holder and the Company’s transfer agent (the “ Transfer Agent ”) and shall authorize the credit by the Transfer Agent of such aggregate number of Conversion Shares to which the Holder is entitled pursuant to such Conversion Notice to Holder’s or its designee’s balance account with The Depository Trust Company (DTC) Fast Automated Securities Transfer (FAST) Program, through its Deposit/Withdrawal at Custodian (DWAC) system, time being of the essence.

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               (ii) No fractional shares of Common Stock are to be issued upon conversion of Series A Preferred Stock, but rather the Company shall issue to Holder scrip or warrants in registered form (certificated or uncertificated) which shall entitle Holder to receive a full share upon the surrender of such scrip or warrants aggregating a full share.
               (iii) The Holder shall not be required to deliver the original certificates for the Series A Preferred Stock in order to effect a conversion hereunder.
               (iv) The Company shall pay any and all taxes which may be payable with respect to the issuance and delivery of Conversion Shares to Holder.
          b. Company Conversion . In the event of a conversion of any Series A Preferred Stock pursuant to a Company Conversion Notice, the Company shall issue to the Holder of such Series A Preferred Stock a number of Conversion Shares equal to (x) the Series A Liquidation Value multiplied by (y) the number of such Series A Preferred Stock subject to the Company Conversion Notice divided by (z) the Conversion Price with respect to such Series A Preferred Stock. If the Company exercises this conversion option with respect to any Series A Preferred Stock (other than Series A Preferred Stock issued as a dividend with respect to Series A Preferred Stock) prior to the fourth anniversary of the issuance of such shares, then in addition to the Conversion Shares to be issued in accordance with the preceding sentence, the Company shall pay to such Holder an additional number of Conversion Shares equal to the following with respect to such converted Series A Preferred Stock (other than Series A Preferred Stock issued as a dividend with respect to Series A Preferred Stock): (i) 35% of the Conversion Shares issuable in respect of such Series A Preferred Stock (other than Series A Preferred Stock issued as a dividend with respect to Series A Preferred Stock) if converted after the six-month anniversary of the Issuance Date but prior to the first anniversary of the Issuance Date, (ii) 27% of the Conversion Shares issuable in respect of such Series A Preferred Stock (other than Series A Preferred Stock issued as a dividend with respect to Series A Preferred Stock) if converted on or after the first anniversary but prior to the second anniversary of the Issuance Date, (iii) 18% of the Conversion Shares issuable in respect of such Series A Preferred Stock (other than Series A Preferred Stock issued as a dividend with respect to Series A Preferred Stock) if converted on or after the second anniversary but prior to the third anniversary of the Issuance Date, and (iv) 9% of the Conversion Shares issuable in respect of such Series A Preferred Stock (other than Series A Preferred Stock issued as a dividend with respect to Series A Preferred Stock) if converted on or after the third anniversary but prior to the fourth anniversary of the Issuance Date.
          c. Holder Conversion . In the event of a conversion of any Series A Preferred Stock pursuant to an Holder Conversion Notice, the Company shall issue to the Holder of such Series A Preferred Stock a number of Conversion Shares equal to (x) the Series A Liquidation Value multiplied by (y) the number of such Series A Preferred Stock subject to the Company Conversion Notice divided by (z) the Conversion Price with respect to such Series A Preferred Stock.

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          d. If the Company at any time on or after the date of issuance of any Preferred Stock subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision will be proportionately reduced and the number of Conversion Shares will be proportionately increased. If the Company at any time on or after such issuance date combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination will be proportionately increased and the number of Conversion Shares will be proportionately decreased. Any adjustment under this Section 4.c shall become effective at the close of business on the date the subdivision or combination becomes effective.
          e. In addition to any adjustments pursuant to Section 4.c if at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “ Purchase Rights ”), then Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which Holder could have acquired if Holder had held the number of shares of Common Stock acquirable upon conversion of all Preferred Stock held by Holder immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.
          f. Definitions . For purposes of this Section 4, the following terms shall have the following meanings:
               (i) The “ Conversion Price ” means a price per share equal to the Closing Bid Price of a share of Common Stock on the Trading Day immediately preceding the date of the applicable Tranche Notice Date, subject to adjustment herein.
               (ii) “ Conversion Shares ” means the shares of Common Stock issuable upon conversion of Series A Preferred Stock.
               (iii) The “ Closing Bid Price ” means, for any security as of any date, the last closing bid price for such security on the Trading Market, as reported by Bloomberg, or, if the Trading Market begins to operate on an extended hours basis and does not designate the closing bid price, then the last bid price of such security prior to 4:00 p.m., Eastern time, as reported by Bloomberg, or, if the Trading Market is not the principal securities exchange or trading market for such security, the last closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last closing bid price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price is reported for such security by Bloomberg, the average of the bid prices of any market makers for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Closing Bid Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price of such security on such date shall be the fair market value as mutually determined by the Company and the holder.

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               (iv) A “ Trading Day ” means any day on which the Common Stock is traded on the Trading Market; provided that it shall not include any day on which the Common Stock is (a) scheduled to trade for less than 5 hours, or (b) suspended from trading.
               (v) The “ Trading Market ” means the OTC Bulletin Board, the NASDAQ Capital Market, the NASDAQ Global Market, the NASDAQ Global Select Market, the NYSE Amex, or the New York Stock Exchange, whichever is at the time the principal trading exchange or market for the Common Stock, but does not include the Pink Sheets inter-dealer electronic quotation and trading system.
               (vi) A “ Tranche Notice Date ” with respect to a Series A Preferred Share shall mean the Tranche Notice Date established for the issuance of such Series A Preferred Stock under the stock purchase agreement pursuant to which such Series A Preferred Share was issued to the Holder thereof.
          g. Failure to Timely Deliver Conversion Shares . If the Company shall fail (through no fault of Holder) to timely authorize the credit of the Holder’s balance account with DTC for such number of Conversion Shares to which the Holder is entitled pursuant to a Conversion Notice, then, in addition to all other remedies available to Holder, the Company shall, subject to the availability of lawful funds therefor, pay in cash to Holder on each day that the issuance of such Conversion Shares is not timely effected an amount equal to 1.5% of the product of (A) the sum of the number of Conversion Shares not issued to Holder on a timely basis and to which Holder is entitled and (B) the Closing Bid Price of the shares of Common Stock on the Trading Day immediately preceding the last possible date which the Company could have issued such Conversion Shares to Holder without violating any other restrictions on the issuance of Conversion Shares to the Holder, including the foregoing clause (h) below. In addition to the foregoing, if after the Company’s receipt of the applicable conversion delivery documents the Company shall fail (through no fault of Holder) to timely authorize the credit of the Holder’s balance account with DTC for the number of Conversion Shares to which the Holder is entitled upon the Holder’s exercise hereunder, and the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of Conversion Shares issuable upon such exercise that the Holder anticipated receiving from the Company, then the Company shall, within one Trading Day after the Holder’s request and in the Holder’s discretion, either (i) pay cash, subject to the availability of lawful funds therefor, to the Holder in an amount equal to the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased (the “ Buy-In Price ”), at which point the Company’s obligation to credit such Holder’s balance account with DTC for the number of Conversion Shares to which the Holder is entitled upon the Holder’s exercise hereunder and to issue such Conversion Shares shall terminate, or (ii) promptly honor its obligation to credit such Holder’s balance account with DTC for the number of Conversion Shares to which the Holder is entitled upon the Holder’s exercise hereunder and pay cash, subject to the availability of lawful funds therefor, to the Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock sold by Holder in satisfaction of its obligations, times (B) the Closing Bid Price on the date of exercise.

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          h. Conversion Limitation . Notwithstanding any other provision in this Agreement, at no time may the Company or Holder deliver a Conversion Notice if the number of Conversion Shares to be received pursuant to such Conversion Notice, aggregated with all other shares of Common Stock then beneficially (or deemed beneficially) owned by Holder, would result in Holder owning, on the date of delivery of the Conversion Notice, more than 9.99% of all Common Stock outstanding as determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. In addition, as of any date, the aggregate number of shares of Common Stock into which the Preferred Stock are convertible within 61 days, together with all other shares of Common Stock then beneficially (or deemed beneficially) owned (as determined pursuant to Rule 13d-3 under the Exchange Act) by Holder and its affiliates (as such term is defined in Rule 12b-2 under the Exchange Act), shall not exceed 9.99% of the total outstanding shares of Common Stock as of such date.
          i. Disputes . In the case of a dispute as to the determination of the Conversion Price or the arithmetic calculation of the number of Conversion Shares issued or issuable hereunder, the Company shall promptly issue to Holder the number of Conversion Shares that are not disputed and resolve such dispute as follows. The Company shall submit the disputed determinations or arithmetic calculations via facsimile or electronic mail within two (2) Trading Days of delivery of the Conversion Notice giving rise to such dispute, as the case may be, to Holder. If Holder and the Company are unable to agree upon such determination or calculation of the Conversion Price or the number of Conversion Shares within three (3) Trading Days of such disputed determination or arithmetic calculation being submitted to Holder, then the Company shall, within two (2) Trading Days, submit via facsimile or electronic mail (a) the disputed determination of the Conversion Price or arithmetic calculation to an independent, reputable investment bank or independent registered public accounting firm selected by Holder subject to the Company’s approval, which may not be unreasonably withheld or delayed, or (b) the disputed arithmetic calculation to the Company’s independent registered public accounting firm. The Company shall cause at its expense the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and Holder of the results no later than three (3) Trading Days from the time it receives the disputed determinations or calculations. Such investment bank’s or accountant’s determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error.
     5.  Liquidation .
          a. Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment or provision for payment of debts and other liabilities of the Corporation, before any distribution or payment shall be made to the holders of any Junior Shares by reason of their ownership thereof, the Holders of Series A Preferred Stock shall first be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders an amount with respect to each share of Series A Preferred Stock equal to $10,000.00 (the “ Series A Liquidation Value ”). If, upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the amounts payable with respect to the shares of Series A Preferred Stock are not paid in full, the holders of shares of Series A Preferred Stock shall share equally and ratably in any distribution of assets of the Corporation in proportion to the liquidation preference to which each such holder is entitled.

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          b. After payment has been made to the Holders of the Series A Preferred Stock of the full amount of the Series A Liquidation Value, any remaining assets of the Corporation shall be distributed among the holders of the Junior Shares in accordance with the Corporation’s Certificates of Designations and Certificate of Incorporation.
          c. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation shall be insufficient to make payment in full to all Holders, then such assets shall be distributed among the Holders at the time outstanding, ratably in proportion to the full amounts to which they would otherwise be respectively entitled.
     6.  Redemption . The Company may redeem, for cash, any or all of the Series A Preferred Stock at any time at the redemption price per share equal to the Series A Liquidation Value, plus any accrued but unpaid dividends with respect to such shares of Series A Preferred Stock (the “ Redemption Price ”). If the Company exercises this redemption option with respect to any Series A Preferred Stock (other than shares of Series A Preferred Stock issued as a dividend with respect to shares of Series A Preferred Stock) prior to the fourth anniversary of the issuance of such shares, then in addition to the Redemption Price, the Company shall pay to holder a make-whole price per share equal to the following with respect to such redeemed shares (other than shares of Series A Preferred Stock issued as a dividend with respect to shares of Series A Preferred Stock): (i) 35% of the Series A Liquidation Value if redeemed prior to the first anniversary of the Issuance Date, (ii) 27% of the Series A Liquidation Value if redeemed on or after the first anniversary but prior to the second anniversary of the Issuance Date, (iii) 18% of the Series A Liquidation Value if redeemed on or after the second anniversary but prior to the third anniversary of the Issuance Date, and (iv) 9% of the Series A Liquidation Value if redeemed on or after the third anniversary but prior to the fourth anniversary of the Issuance Date.
     7.  Transferability . The Series A Preferred Stock may only be sold, transferred, assigned, pledged or otherwise disposed of (“ Transfer ”) in accordance with state and federal securities laws. The Corporation shall keep at its principal office, or at the offices of the Transfer Agent, a register of the Series A Preferred Stock. Upon the surrender of any certificate representing Series A Preferred Stock at such place, the Corporation, at the request of the record Holder of such certificate, shall execute and deliver (at the Corporation’s expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of shares represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of shares as is requested by the Holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate.
     8.  Miscellaneous .
          a. Notices . Any and all notices to the Corporation shall be addressed to the Corporation’s Chief Executive Officer or Chief Financial Officer at the Corporation’s principal place of business on file with the Secretary of State of the State of Delaware. Any and all notices

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or other communications or deliveries to be provided by the Corporation to any Holder hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile telephone number or address of such Holder appearing on the books of the Corporation, or if no such facsimile telephone number or address appears, at the principal place of business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this section prior to 5:30 p.m. Eastern time, (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this section later than 5:30 p.m. but prior to 11:59 p.m. Eastern time on such date, (iii) the second business day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given.
          b. Lost or Mutilated Preferred Stock Certificate . Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered Holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing shares of Series A Preferred Stock, and in the case of any such loss, theft or destruction upon receipt of indemnity reasonably satisfactory to the Corporation (provided that if the Holder is a financial institution or other institutional investor its own agreement shall be satisfactory) or in the case of any such mutilation upon surrender of such certificate, the Corporation shall, at its expense, execute and deliver in lieu of such certificate a new certificate of like kind representing the number of shares of such series represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate.
          c. Headings . The headings contained herein are for convenience only, do not constitute a part of this Certificate of Designations and shall not be deemed to limit or affect any of the provisions hereof.
     RESOLVED, FURTHER, that the chairman, chief executive officer, president, chief financial officer, or any vice-president, and the secretary or any assistant secretary, of the Corporation be and they hereby are authorized and directed to prepare and file a Certificate of Designations of Preferences, Rights and Limitations of Series A Preferred Stock in accordance with the foregoing resolution and the provisions of Delaware law.

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     IN WITNESS WHEREOF, the undersigned have executed this Certificate this 29th day of September 2009.
         
By:
  /s/ Scott R. Silverman    
 
       
Name:
  Scott R. Silverman    
Title:
  Chief Executive Officer    
 
       
By:
  /s/ William J. Caragol    
 
       
Name:
  William J. Caragol    
Title:
  Acting Chief Financial Officer    

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Exhibit A-1
Form of Investor Conversion Notice
INVESTOR CONVERSION NOTICE
     The undersigned hereby exercises the right to purchase ____________ shares of Common Stock (“ Conversion Shares ”) of VeriChip Corporation, a Delaware corporation (“ Company ”), upon conversion of ____________ shares of Series A Preferred Stock. Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Convertible Preferred Stock Purchase Agreement dated September 29, 2009, by and between the Company and the Investor referred to therein.
     Unless otherwise instructed by the holder, the Company will issue said shares in electronic form to the Deposit/Withdrawal at Custodian (DWAC) account of the holder with Depository Trust Company (DTC) pursuant to account information previously provided to Company by the holder.
 
 
By:  
 
Name:  
 
Title:  
 

 


 

Exhibit A-2
Form of Company Conversion Notice
     VeriChip Corporation, a Delaware corporation (“ Company ”) hereby exercises the right to cause the purchase of ____________ shares of its Common Stock (“ Conversion Shares ”), upon conversion of ____________ shares of Series A Preferred Stock of the Company held by the holder thereof. Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Convertible Preferred Stock Purchase Agreement dated September 29, 2009, by and between the Company and the Investor referred to therein.
     Unless otherwise instructed by the holder, the Company will issue said shares in electronic form to the Deposit/Withdrawal at Custodian (DWAC) account of the holder with Depository Trust Company (DTC) pursuant to account information previously provided to Company by the holder.
VERICHIP CORPORATION
 
By:  
 
Name:  
 
Title:  
 

 


 

POSITIVEID CORPORATION

CERTIFICATE OF DESIGNATIONS
OF PREFERENCES, RIGHTS AND LIMITATIONS
OF
SERIES B PREFERRED STOCK
The undersigned, Scott R. Silverman and William J. Caragol hereby certify that:
1. They are the Chief Executive Officer and President and Chief Financial Officer, respectively, of PositiveID Corporation, a Delaware corporation (the “ Corporation ”).
2. The Corporation is authorized to issue 5,000,000 shares of preferred stock.
3. The following resolutions were duly adopted by the Board of Directors:
WHEREAS, the Certificate of Incorporation of the Corporation provides for a class of its authorized stock known as preferred stock, comprised of 5,000,000 shares, $0.001 par value per share (the “ Preferred Stock ”), issuable from time to time in one or more series, of which 2,000 shares have previously been designed as Series A Preferred Stock, with 462 shares of Series A Preferred Stock currently issued and outstanding;
WHEREAS, the Board of Directors of the Corporation is authorized to fix the dividend rights, dividend rate, voting rights, conversion rights, rights and terms of redemption and liquidation preferences of any wholly unissued series of Preferred Stock and the number of shares constituting any series and the designation thereof, of any of them; and
WHEREAS, it is the desire of the Board of Directors of the Corporation, pursuant to its authority as aforesaid, to fix the rights, preferences, restrictions and other matters relating to a series of Preferred Stock, which shall consist of up to 1,600 shares of the Preferred Stock which the Corporation has the authority to issue, with face value of $10,000.00 per share, as follows:
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby provide for the issuance of a series of Preferred Stock for cash or exchange of other securities, rights or property and does hereby fix and determine the rights, preferences, restrictions and other matters relating to such series of Preferred Stock as follows:
TERMS OF PREFERRED STOCK
1.  Designation, Amount and Par Value . The series of Preferred Stock shall be designated as the Corporation’s Series B Preferred Stock (the “ Series B Preferred Stock ”) and the number of shares so designated shall be 1,600 (which shall not be subject to increase without any consent of the holders of the Series B Preferred Stock (each a “ Holder ” and collectively, the “ Holders ”) that may be required by applicable law. Each share of Series B Preferred Stock shall have a par value of $0.001 per share.

 

 


 

2.  Ranking and Voting .
a.  Ranking . The Series B Preferred Stock shall, with respect to dividend rights and rights upon liquidation, winding-up or dissolution, rank: (i) senior to the Corporation’s common stock, par value $0.01 per share (“ Common Stock ”), and any other class or series of preferred stock of the Corporation except as set forth in clause (ii) below (collectively, together with any warrants, rights, calls or options exercisable for or convertible into such Preferred Stock, the “ Junior Securities ”); and (ii) junior to the Series A Preferred Stock and all existing and future indebtedness of the Corporation (the “ Senior Securities ”).
b.  Voting . Except as required by applicable law or as set forth herein, the holders of shares of Series B Preferred Stock will have no right to vote on any matters, questions or proceedings of this Corporation including, without limitation, the election of directors.
3.  Dividends and Other Distributions . Commencing on the date of the issuance of any such shares of Series B Preferred Stock (each respectively an “ Issuance Date ”), Holders of Series B Preferred Stock shall be entitled to receive annual dividends on each outstanding share of Series B Preferred Stock (“ Dividends ”), which shall accrue in shares of Series B Preferred Stock at a rate equal to 10.0% per annum from the Issuance Date. Accrued Dividends shall be payable upon redemption of the Series B Preferred Stock in accordance with Section 6 .
a. Any calculation of the amount of such Dividends payable pursuant to the provisions of this Section 3 shall be made based on a 365-day year and on the number of days actually elapsed during the applicable period, compounded annually.
b. So long as any shares of Series A Preferred Stock are outstanding, no dividends or other distributions will be paid, declared or set apart with respect to the Series B Preferred Stock or any Junior Securities.
4.  Protective Provision . So long as any shares of Series B Preferred Stock are outstanding, the Corporation shall not, without the affirmative approval of the Holders of a majority of the shares of the Series B Preferred Stock then outstanding (voting as a class) where such vote is required by applicable law: (a) alter or change adversely the powers, preferences or rights given to the Series B Preferred Stock or alter or amend this Certificate of Designations, (b) authorize or create any class of stock ranking as to distribution of assets upon a liquidation senior to or otherwise pari passu with the Series B Preferred Stock, (c) amend its certificate of incorporation or other charter documents in breach of any of the provisions hereof, (d) increase the authorized number of shares of Series B Preferred Stock, or (e) liquidate, dissolve or wind-up the business and affairs of the Corporation, or effect any Deemed Liquidation Event (as defined below).
a. A “ Deemed Liquidation Event ” shall mean: (i) a merger or consolidation in which the Corporation is a constituent party or a subsidiary of the Corporation is a constituent party and the Corporation issues shares of its capital stock pursuant to such merger or consolidation, except any such merger or consolidation involving the Corporation or a subsidiary in which the shares of capital stock of the Corporation outstanding immediately prior to such merger or consolidation continue to represent, or are converted into or exchanged for shares of capital stock that represent, immediately following such merger or consolidation, at least a majority, by voting power, of the capital stock of the surviving or resulting corporation or if the surviving or resulting corporation is a wholly owned subsidiary of another corporation immediately following such merger or consolidation, the parent corporation of such surviving or resulting corporation; or (ii) the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions, by the Corporation or any subsidiary of the Corporation of all or substantially all the assets of the Corporation and its subsidiaries taken as a whole, or the sale or disposition (whether by merger or otherwise) of one or more subsidiaries of the Corporation if substantially all of the assets of the Corporation and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly-owned subsidiary of the Corporation.

 

 


 

b. The Corporation shall not have the power to effect a Deemed Liquidation Event referred to in Section 4(a) unless the agreement or plan of merger or consolidation for such transaction provides that the consideration payable to the stockholders of the Corporation shall be allocated among the holders of capital stock of the Corporation in accordance with Section 5 .
5.  Liquidation .
a. Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment or provision for payment of debts and other liabilities of the Corporation and any liquidation preferences to the Senior Securities, before any distribution or payment shall be made to the holders of any Junior Securities by reason of their ownership thereof, the Holders of Series B Preferred Stock shall first be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders an amount with respect to each outstanding share of Series B Preferred Stock equal to $10,000.00 (the “ Original Series B Issue Price ”), plus any accrued but unpaid Dividends thereon (collectively, the “ Series B Liquidation Value ”). If, upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the amounts payable with respect to the shares of Series B Preferred Stock are not paid in full, the holders of shares of Series B Preferred Stock shall share equally and ratably in any distribution of assets of the Corporation in proportion to the liquidation preference and an amount equal to all accumulated and unpaid Dividends, if any, to which each such holder is entitled.
b. After payment has been made to the Holders of the Series B Preferred Stock of the full amount of the Series B Liquidation Value, any remaining assets of the Corporation shall be distributed among the holders of the Corporation’s Junior Securities in accordance with the Corporation’s Certificates of Designations and Certificate of Incorporation.
c. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation shall be insufficient to make payment in full to all Holders, then such assets shall be distributed among the Holders at the time outstanding, ratably in proportion to the full amounts to which they would otherwise be respectively entitled.

 

 


 

6.  Redemption .
a.  Corporation’s Redemption Option . Upon or after the fourth anniversary of the initial Issuance Date, the Corporation shall have the right, at the Corporation’s option, to redeem all or a portion of the shares of Series B Preferred Stock, at a price per share equal to 100% of the Series B Liquidation Value (the “ Corporation Redemption Price ”).
b.  Early Redemption . Prior to redemption pursuant to Section 6(a) hereof, the Corporation shall have the right, at the Corporation’s option, to redeem all or a portion of the shares of Series B Preferred Stock, at a price per share equal to the Corporation Redemption Price plus: (i) 35% of the Series B Liquidation Value if redeemed prior to the first anniversary of the Issuance Date, (ii) 27% of the Series B Liquidation Value if redeemed on or after the first anniversary but prior to the second anniversary of the Issuance Date, (iii) 18% of the Series B Liquidation Value if redeemed on or after the second anniversary but prior to the third anniversary of the Issuance Date, and (iv) 9% of the Series B Liquidation Value if redeemed on or after the third anniversary but prior to the fourth anniversary of the Issuance Date.
c.  Mandatory Redemption. If the Corporation determines to liquidate, dissolve or wind-up its business and affairs, or effect any Deemed Liquidation Event, the Corporation shall redeem the Series B Preferred Stock at the Corporation Redemption Price (plus the premium for early redemption set forth in Section 6(b) above if applicable).
d.  Mechanics of Redemption . If the Corporation elects to redeem any of the Holders’ Series B Preferred Stock then outstanding, it shall do so by delivering written notice thereof via facsimile and overnight courier (“ Notice of Redemption at Option of Corporation ”) to each Holder, which Notice of Redemption at Option of Corporation shall indicate (A) the number of shares of Series B Preferred Stock that the Corporation is electing to redeem and (B) the Corporation Redemption Price (plus the premium for early redemption pursuant to Section 6(b) if applicable).
e.  Payment of Redemption Price . Upon receipt by any Holder of a Notice of Redemption at Option of Corporation, such Holder shall promptly submit to the Corporation such Holder’s Series B Preferred Stock certificates. Upon receipt of such Holder’s Series B Preferred Stock certificates, the Corporation shall pay the Corporation Redemption Price (plus the premium for early redemption pursuant to Section 6(b) if applicable), to such Holder, at the Corporation’s sole option either (i) in cash, or (ii) by offset against any outstanding note payable from Holder or its affiliates to the Corporation that was issued by Holder or its affiliates.
7. Transferability . The Series B Preferred Stock may only be sold, transferred, assigned, pledged or otherwise disposed of (“ Transfer ”) in accordance with state and federal securities laws. The Corporation shall keep at its principal office, or at the offices of the transfer agent, a register of the Series B Preferred Stock. In connection with any such transfer, upon the surrender of any certificate representing Series B Preferred Stock at such place, the Corporation, at the request of the record Holder of such certificate, shall execute and deliver (at the Corporation’s expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of shares represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of shares as is requested by the Holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate.

 

 


 

8.  Miscellaneous .
a.  Notices . Any and all notices to the Corporation shall be addressed to the Corporation’s President or Chief Executive Officer at the Corporation’s principal place of business on file with the Secretary of State of the State of Delaware. Any and all notices or other communications or deliveries to be provided by the Corporation to any Holder hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile telephone number or address of such Holder appearing on the books of the Corporation, or if no such facsimile telephone number or address appears, at the principal place of business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section 8 prior to 5:30 p.m. Eastern time, (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this section later than 5:30 p.m. but prior to 11:59 p.m. Eastern time on such date, (iii) the second business day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given.
b.  Lost or Mutilated Preferred Stock Certificate . Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered Holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing shares of Series B Preferred Stock, and in the case of any such loss, theft or destruction upon receipt of indemnity reasonably satisfactory to the Corporation (provided that if the Holder is a financial institution or other institutional investor its own indemnity agreement shall be satisfactory) or in the case of any such mutilation upon surrender of such certificate, the Corporation shall, at its expense, execute and deliver in lieu of such certificate a new certificate of like kind representing the number of shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate.
c.  Headings . The headings contained herein are for convenience only, do not constitute a part of this Certificate of Designations and shall not be deemed to limit or affect any of the provisions hereof.

 

 


 

RESOLVED, FURTHER, that the chairman, chief executive officer, president or any vice-president, and the secretary or any assistant secretary, of the Corporation be and they hereby are authorized and directed to prepare and file a Certificate of Designations of Preferences, Rights and Limitations of Series B Preferred Stock in accordance with the foregoing resolution and the provisions of Delaware law.
IN WITNESS WHEREOF, the undersigned have executed this Certificate of Designations this 28 th day of April, 2010.
             
By:   /s/ Scott R. Silverman    
         
 
  Name:   Scott R. Silverman    
 
  Title:   Chief Executive Officer    
 
           
By:   /s/ William J. Caragol    
         
 
  Name:   William J. Caragol    
 
  Title:   President and Chief Financial Officer    

 

 

Exhibit 10.1
FIRST AMENDMENT
TO
DEVELOPMENT/MASTER AGREEMENT
This First Amendment to Development/Master Agreement (the “Amendment”) is made this 22nd day of April, 2010 (the “Effective Date”), by and between PositiveID Corporation, a Delaware corporation formerly known as VeriChip Corporation (the “Company”), and Receptors, LLC, a Minnesota limited liability company (“Receptors”). The Company and Receptors shall be referred to individually as a “Party” and collectively as the “Parties.”
RECITALS
WHEREAS , the Parties entered into that certain Development/Master Agreement, dated September 21, 2009 (the “Agreement”), and the Parties desire to enter into this Amendment to modify certain terms of the Agreement.
NOW THEREFORE , in consideration of the mutual covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
1.  Definitions . All capitalized terms used herein, except as modified or defined in this Amendment, shall have the meaning given to such terms in the Agreement.
2.  Amendment .
  a.   Exhibit B . Exhibit B to the Agreement shall be deleted and replaced by the Exhibit B attached to this Amendment.
  b.   Exhibit D . The language set forth in the section entitled “Phase II” of Exhibit D to the Agreement shall be deleted and replaced by the following: “Phase II — The Company shall make a cash payment to Receptors of $160,000, of which $60,000 shall be paid on April 23, 2010, $50,000 shall be paid on July 1, 2010, and $50,000 shall be paid on October 1, 2010. In addition, the Company shall issue to Receptors 240,000 shares of restricted Company common stock, pursuant to the terms and conditions set forth in that certain Restricted Stock Agreement, attached hereto as Attachment One , which Restricted Stock Agreement shall be executed by the Parties on the Effective Date as a condition to the issuance of the 240,000 shares of restricted Company common stock.”
3.  No Implied Modifications; Inconsistencies . Except as expressly modified hereby, all terms and provisions of the Agreement shall remain unchanged and in full force and effect. In the event of an inconsistency between the terms of this Amendment and the terms of the Agreement, the terms hereof shall control.
4.  Counterparts . This Amendment may be executed in any number of counterparts, and all such counterparts shall together constitute but one instrument. Facsimile and portable document format signatures shall have the same force and effect as if such electronic signature pages were an original thereof.
(Remainder of page intentionally left blank; signature page follows)

 

 


 

IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed as of the date first written above.
         
  POSITIVEID CORPORATION
 
 
  By:   /s/ William J. Caragol    
    Name:   William J. Caragol   
    Title:   President and Chief Financial Officer   
 
  RECEPTORS, LLC
 
 
  By:   /s/ Robert E. Carlson    
    Name:   Robert E. Carlson   
    Title:   President   

 

 


 

EXHIBIT B
PROGRAM TITLE:
Development of a Point-of-Care and Clinical Laboratory Multiplexed Sensing System for the Detection and Sub-type, including Specifically H1N1, Identification of the Influenza Virus.
PHASE II. PROTOTYPE DEVELOPMENT
SUMMARY DESCRIPTION:
Receptors will use its best efforts to develop of a prototype sensing system built on the proof-of-principle from Phase I that will sub-type identify the influenza virus, especially H1N1, in a nasal swab or nasal wash sample.
DELIVERABLE:
LAB-SCALE PROTOTYPE with report, device and demonstration.
PHASE II PROJECT PLAN:
1. DEVELOPMENT AND APPLICATION OF HTS SYSTEM (2 months)
    Development of magnetic bead, dendrimer, virus system in 384-well format for high-thoughput selection of bead / dendrimer pairs.
 
    Application to HTS to define critical variable parameters.
2. DEVELOPMENT OF DATA GRID TO EVALUATE THE KEY VARIABLES OF CARA, DENDRIMER, VIRUS SUB-TYPE AND MATRIX (4 months)
    Application of the HTS to develop the single and multiplexed data.
 
    Database evaluation of CARA and peptide-dendrimer competitor pairs for single and multiplexed sub-type detection.
 
    Selection of candidate single and multiplexed CARA and competitor pairs optimized with respect to the virus sub-type and matrix variables.
3. PROOF-OF-CONCEPT DEMONSTRATION OF THE MULTIPLEXED, SUB-TYPE IDENTIFICATION DEVICE (2 months)
    Candidate to lead selection and optimization.
 
    Multiplexed lead integration and point-of-care protocol in matrix (2 months)
4. LAB-SCALE PROTOTYPE (2 months)
    Prototype demonstration.
 
    Lab-scale SOP’s
PHASE II TIMELINE: March 1, 2010 — December 31, 2010 (10 months)
     
1. DEVELOPMENT HTS SYSTEM (2 months)
  MAR-APR
2. DEVELOPMENT OF DATA GRID (4 months)
  MAY-AUG
3. PROOF-OF-CONCEPT DEMONSTRATION (2 months)
  SEP-OCT
4. LAB-SCALE PROTOTYPE (2 months)
  NOV-DEC

 

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ATTACHMENT ONE
RESTRICTED STOCK AGREEMENT
This RESTRICTED STOCK AGREEMENT (the “Agreement”) is made as of April 22, 2010 (the “Effective Date”) between PositiveID Corporation, a Delaware corporation (the “Company”) and Receptors LLC, a Minnesota limited liability company (“Receptors”).
Background Information
A. The parties to this Agreement are parties to a Development/Master Agreement, dated September 21, 2009, by and between the Company and Receptors (the “Master Agreement”).
B. The parties to this Agreement have decided to execute an amendment to the Master Agreement, dated as of even date herewith (the “Amendment”), pursuant to which the Company will issue restricted shares of Company common stock, par value $0.01 per share, to Receptors.
C. Receptors desires to accept the Restricted Stock (as such term is defined below) pursuant to the Amendment and agrees to be bound by the terms and conditions of this Agreement.
Agreement
1.  Restricted Stoc k. As partial consideration for entering into the Amendment and subject to the terms and conditions provided in this Agreement, the Company hereby issues to Receptors 240,000 shares of Company common stock (the “Restricted Stock”) as of the Effective Date. Such shares are fully paid and non-assessable. The extent to which Receptors’ right to transfer, pledge or hypothecate the Restricted Stock becomes vested shall be determined in accordance with the provisions of Section 2 of this Agreement.
2.  Vesting . Receptors’ right to transfer, pledge or hypothecate the Restricted Stock shall be determined in accordance with this Section 2. Receptors’ right to transfer, pledge or hypothecate the Restricted Stock shall become fully vested and shall cease being restricted as follows: (i) 80,000 shares shall vest on the Effective Date; (ii) 80,000 shares shall vest on June 30, 2010; and (iii) 80,000 shares shall vest on the earlier of (a) December 31, 2010 or (b) completion and delivery to the Company of a prototype report, device and demonstration as provided in Exhibit B, Phase II, to the Master Agreement, as amended.
3.  Restrictions on Transfer; Legending of Shares . Until such time as any share of Restricted Stock becomes vested pursuant to Section 2 of this Agreement, Receptors shall not have the right to make or permit to occur any transfer, pledge or hypothecation of all or any portion of the Restricted Stock, whether outright or as security, with or without consideration, voluntary or involuntary. Any transfer, pledge or hypothecation not made in accordance with this Agreement shall be deemed null and void. The certificate evidencing the Restricted Stock shall contain a legend in substantially the following form:
“The shares evidenced by this certificate are subject to restrictions on transfer set forth in the Restricted Stock Agreement, dated April 22, 2010, between PositiveID Corporation (the “Company”) and Receptors, LLC, a copy of which may be obtained from the Company at its principal executive offices.”
“The shares of common stock of the Company represented hereby have not been registered under the Securities Act of 1933, as amended, or applicable state securities laws and may not be transferred, pledged, hypothecated or otherwise disposed of in the absence of an effective registration statement covering such shares under that Act and any applicable state securities laws, unless, in the opinion of counsel satisfactory to the Company, an exemption from registration thereunder is available.”

 

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4.  Removal of Restriction . As each tranche of Restricted Stock vests pursuant to paragraph 2 hereof, upon written notice to the Company by Receptors, the Company shall immediately remove the restriction contained in the first paragraph of the legend referenced in paragraph 3 hereof.
5.  Rights to Dividends and Voting Rights . During the period that the Restricted Stock has not vested, subject to this Section 5, Receptors shall be entitled to all rights applicable to shares of common stock of the Company so held, including the right to vote and receive dividends, but provided, however, in the event of (i) any change in the common stock of the Company by reason of any stock dividend, spin-off, split-up, spin-out, recapitalization, merger, consolidation, reorganization, combination or exchange of shares or (ii) any distribution of common stock or other securities of the Company in respect of such shares of common stock, Receptors agrees that any certificate representing shares of such additional common stock or other securities of the Company issued as a result of any of the foregoing shall be delivered to the Company and shall be subject to all of the provisions of this Agreement as if initially received hereunder.
6.  Governing Laws . This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware, without regard to any applicable conflicts of law. By accepting the Restricted Stock, Receptors irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the courts of the State of Florida or of the United States of America, in each case located in Palm Beach County, Florida, for any litigation arising out of or relating to this Agreement (and agrees not to commence any litigation relating thereto except in such courts). Receptors also irrevocably and unconditionally waives any objection to the laying of venue of any litigation arising out of or related to this Agreement in the courts of the State of Florida or of the United States of America, in each case located in Palm Beach County, Florida, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such litigation brought in any such court has been brought in an inconvenient forum.
7.  Successors . This Agreement shall inure to the benefit of, and be binding upon, the Company and Receptors and their legal representatives, successors and permitted assigns.
8.  Severabilit y. In the event that any one or more of the provisions or portion thereof contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, the same shall not invalidate or otherwise affect any other provisions of this Agreement, and this Agreement shall be construed as if the invalid, illegal or unenforceable provision or portion thereof had never been contained herein.
9.  Piggyback Registration . If at any time the Company proposes to register shares of its common stock under the Securities Act of 1933, as amended (the “Securities Act”), in connection with the public offering of such shares for cash (a “Proposed Registration”) other than a registration statement on Form S-8 or Form S-4 or any successor or other forms promulgated for similar purposes, the Company shall, at such time, promptly give Receptors written notice of such Proposed Registration. Receptors shall have ten (10) days from its receipt of such notice to deliver to the Company a written request specifying the amount of Restricted Stock that Receptors intends to sell and Receptors’ intended method of distribution. Upon receipt of such request, the Company shall use its commercially reasonable efforts to cause all Restricted Stock that Receptors has been requested to register to be registered under the Securities Act to the extent necessary to permit their sale or other disposition in accordance with the intended methods of distribution specified in Receptors’ request; provided, however, that the Company shall have the right to postpone or withdraw any registration effected pursuant to this Section 9 without obligation to Receptors. If, in connection with any underwritten public offering for the account of the Company or for stockholders of the Company that have contractual rights to require the Company to register shares of common stock, the managing underwriter(s) thereof shall impose a limitation on the number of shares of common stock which may be included in a registration statement because, in the judgment of such underwriter(s), marketing or other factors dictate such limitation is necessary to facilitate such offering, then the Company shall be obligated to include in the registration statement only such limited portion of the Restricted Stock with respect to which Receptors has requested inclusion hereunder as such underwriter(s) shall permit; provided , howeve r, shares that are eligible to be sold pursuant to Rule 144 (or any similar provision then in force) without restriction under the Securities Act shall not be subject to the registration requirements of this Section 9.

 

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10.  Notices . All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (c) three (3) business days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent as follows:
If to the Company:
PositiveID Corporation
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
Attn: William J. Caragol
If to Receptors:
Receptors LLC
Suite 501B/MD57
1107 Hazeltine Blvd.
Chaska, MN 55318
Attn: Robert E. Carlson, Ph.D
11.  Headings . Section headings used herein are for convenience of reference only and shall not be considered in construing this Agreement.
12.  Additional Acknowledgements . By their signatures below (including electronic signatures), Receptors and the Company agree that the Restricted Stock is granted under and governed by the terms and conditions of this Agreement. Receptors has reviewed the terms of this Agreement, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of this Agreement.
13.  Counterparts . This Agreement may be executed in any number of counterparts that when taken together shall be considered one and the same agreement. Facsimile and portable document format signatures shall have the same force and effect as if such electronic signature pages were an original thereof.
(Remainder of page intentionally left blank; signature page follows)

 

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IN WITNESS WHEREOF, the Company and Receptors have executed this Agreement as of the Effective Date set forth above.
         
  POSITIVEID CORPORATION
 
 
  By:   /s/ William J. Caragol    
    Name:   William J. Caragol   
    Title:   President   
 
  RECEPTORS, LLC
 
 
  By:   /s/ Robert E. Carlson    
    Name:   Robert E. Carlson   
    Title:   President   
 

 

 

Exhibit 31.1
Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Scott R. Silverman, certify that:
1.   I have reviewed this Quarterly Report on Form 10-Q of PositiveID Corporation;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: May 6, 2010  /s/ Scott R. Silverman    
  Scott R. Silverman   
  Chief Executive Officer
(Principal Executive Officer) 
 

 

 

Exhibit 31.2
Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, William J. Caragol, certify that:
1.   I have reviewed this Quarterly Report on Form 10-Q of PositiveID Corporation;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: May 6, 2010  /s/ William J. Caragol    
  William J. Caragol   
  President and Chief Financial Officer (Principal Financial Officer)   

 

 

Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of PositiveID Corporation (the “Company”) on Form 10-Q for the period ending March 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Scott R. Silverman, Chief Executive Officer of the Company, and I, William J. Caragol, President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)   The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
     
/s/ Scott R. Silverman
 
Scott R. Silverman
   
Chief Executive Officer
   
 
   
Date: May 6, 2010
   
 
   
/s/ William J. Caragol
   
  
   
William J. Caragol
   
President and Chief Financial Officer
   
Date: May 6, 2010
A signed original of this written statement required by Section 906 has been provided to PositiveID Corporation and will be retained by PositiveID Corporation and furnished to the Securities and Exchange Commission or its staff upon request.