PART
I
Item
1. Business
The
Company
PositiveID
Corporation, including its wholly-owned subsidiaries PositiveID Diagnostics Inc. (“PDI”) and Thermomedics, Inc. (“Thermomedics”),
and its majority-owned subsidiary, ExcitePCR Corporation (“ExcitePCR”), and its 24% owned subsidiary (as of the
date of this report), E-N-G Mobile Systems, Inc. (50.2% at December 31, 2017) (“ENG”) (collectively, the
“Company” or “PositiveID”), develops molecular diagnostic systems for bio-threat detection and rapid medical
testing; manufactures specialty technology vehicles; and markets the Caregiver® non-contact clinical thermometer. The Company’s
fully automated pathogen detection systems are designed to detect a range of biological threats. The Company’s M-BAND (Microfluidic
Bio-agent Autonomous Networked Detector) system is an airborne bio-threat detection system developed for the homeland defense
industry to detect biological weapons of mass destruction. The Company is developing the FireflyDX family of products, which are
automated pathogen detection systems for rapid diagnostics, in both portable and handheld forms, for clinical and point-of-need
applications. The Company also manufactures specialty technology vehicles focused primarily on mobile laboratory and communications
applications. The Company’s Caregiver® thermometer is an FDA-cleared infrared thermometer for the professional healthcare
market.
PositiveID,
formerly known as VeriChip Corporation, was formed as a Delaware corporation by Digital Angel Corporation in November 2001. In
January 2002, we began our efforts to create a market for radio frequency identification, or RFID, systems that utilized a human
implantable microchip. During the first half of 2005 we acquired two businesses focused on providing RFID systems for healthcare
applications. Those businesses (EXi Wireless and Instantel) were merged in 2007 to form Xmark Corporation (“Xmark”),
which was a wholly-owned subsidiary of ours.
On
July 18, 2008, we completed the sale of all of the outstanding capital stock of Xmark, which at the time was principally all of
our operations, to Stanley Canada Corporation (“Stanley”), a wholly-owned subsidiary of Stanley Black and Decker.
The sale transaction was closed for $47.9 million in cash, which consisted of the $45 million purchase price plus a balance sheet
adjustment of approximately $2.9 million, which was adjusted to $2.8 million at settlement of the escrow. Under the terms of the
stock purchase agreement, $43.4 million of the proceeds were paid at closing and $4.4 million was released from escrow in July
2009. As a result, we recorded a gain on the sale of Xmark of $6.2 million, with $4.5 million of that gain deferred until 2009
when the escrow was settled.
Following
the completion of the sale of Xmark to Stanley, we retired all of our outstanding debt for a combined payment of $13.5 million
and settled all contractual payments to Xmark’s and our officers and management for $9.1 million. On August 28, 2008, we
paid a special dividend to our stockholders of $15.8 million.
On
May 23, 2011, we entered into a stock purchase agreement to acquire PDI (f/k/a Microfluidic Systems), pursuant to which PDI became
a wholly-owned subsidiary of the Company. The Company specializes in the production of automated instruments for a wide range
of applications in the detection and processing of biological samples, ranging from rapid medical testing to airborne pathogen
detection for homeland security.
On
October 21, 2015, we entered into an agreement to acquire all of the outstanding capital stock of Thermomedics, a Nevada corporation,
pursuant to a stock purchase agreement by and between PositiveID and Sanomedics Inc., a Delaware corporation (“Sanomedics”),
the shareholder of Thermomedics (collectively the “Thermomedics Acquisition”). On December 4, 2015, we entered into
a first amendment to the stock purchase agreement with Sanomedics. PositiveID, Sanomedics and Thermomedics also entered into a
management services and control Agreement (the “Control Agreement”), dated December 4, 2015, whereby PositiveID was
appointed the manager of Thermomedics. On March 4, 2016, PositiveID, Sanomedics and Thermomedics entered into a letter agreement
(the “March Agreement”), which included an amendment to the Control Agreement, an agreement to terminate intercompany
indebtedness, and an agreement for the transfer of Thermomedics’ intellectual property. Under the terms of the March Agreement,
PositiveID, Sanomedics and Thermomedics agreed to extend the closing date for the stock purchase agreement to March 31, 2016.
As a result of the Company assuming control of Thermomedics on December 4, 2015, the Company determined, pursuant to ASC 805-10-25-6,
that December 4, 2015 was the acquisition date of Thermomedics for accounting purposes and began consolidating the balance sheet
and results of operations of Thermomedics as of that date. The Company completed the acquisition of the capital stock of Thermomedics
on August 25, 2016.
On
December 22, 2015, we entered into a stock purchase agreement to acquire ENG, pursuant to which ENG became a wholly-owned subsidiary.
ENG manufactures specialty technology vehicles focused primarily on mobile labs, command and communications centers, and cellular
applications. The acquisition of ENG closed on December 24, 2015.
On
June 12, 2017, the Company sold 49.8% ownership of ENG to a strategic investor. Accordingly, the Company is presenting
noncontrolling interests as a component of equity on its consolidated balance sheets under the heading “Non-controlling
interest in consolidated subsidiary” and reports noncontrolling interest net income or loss under the heading “Net
(income) loss allocated to noncontrolling interest in consolidated subsidiary” in the consolidated statements of operations
based on its 50.2% ownership.
On
August 24, 2017, the Company and its wholly-owned subsidiary PositiveID Diagnostics, Inc. (collectively, the “Seller”),
entered into an Asset Purchase Agreement (“APA”) with ExcitePCR Corporation (“ExcitePCR”). Pursuant to
the APA, at closing, the Seller will sell and deliver to ExcitePCR all right, title and interest in all assets used or useful
in connection with the operation of the FireflyDX technology, which consists of the FireflyDX intellectual property and that of
its predecessor, the Dragonfly Dx technology and products, along with patents, the applicable know how used in the development
of the FireflyDX and Dragonfly Dx technology, and breadboard prototypes of both products (the “Firefly Technology”).
The consideration to be paid by ExcitePCR to the Seller pursuant to the APA, will be 10,500,000 shares of common stock of ExcitePCR,
and the Company will own approximately 91% of ExcitePCR post-closing of the sale (prior to any financing). As a condition to the
Seller’s obligation to close the transaction, ExcitePCR shall have completed a financing transaction with net proceeds to
ExcitePCR of at least $3 million. Additional conditions and deliverables at closing include a patent assignment agreement, accounting
services agreement, license agreement, and certain required consents from third parties. As of December 31, 2017, ExcitePCR and
the Company had not yet closed the transaction.
The
Company believes that the Firefly Technology has significant potential value to stockholders. The parties have entered into the
APA so ExcitePCR can secure financing and then independently pursue the development, improvement and commercialization of the
Firefly Technology. The current stockholders of ExcitePCR (in addition to the Company which is the majority holder) include two
third-party individuals, who are working with ExcitePCR to develop and execute the business plan of ExcitePCR. Lyle L. Probst
(the Company’s President) is the Chief Executive Officer of ExcitePCR, William J. Caragol (the Company’s Chairman
and CEO), is the Chairman of ExcitePCR.
On January 30, 2018, ENG,
in order to raise working capital, sold additional ownership of ENG to the strategic investor and as a result of this transaction,
the Company’s equity interest in ENG has decreased to 24%. At December 31, 2017 the Company owned 50.2% of ENG and
controlled ENG’s assets. These assets represented between 50% and 55% of the Company’s overall assets. As a result
of the decreased ownership, as of January 30, 2018, the Company no longer controls ENG’s operations which will result in
the deconsolidation of ENG in 2018. The operations and assets of ENG represent a significant amount of the Company’s assets.
The Company will prospectively deconsolidate the balance sheet, results of operations and cash flows of ENG in its consolidated
financial statements.
Beginning
with the acquisition of PDI in 2011, the Company began to focus its operations on diagnostics and detection. Since that acquisition,
the Company has either sold or exclusively licensed all of its legacy businesses, including its VeriChip assets, its iglucose™
technology, the GlucoChip technology, and its patent related to a glucose breath detection system. See “Our Business”
under Part I of this Form 10-K for more information and a description of the Company’s current business.
Our
principal executive offices are located at 1690 South Congress Avenue, Suite 201, Delray Beach, Florida 33445. Our telephone number
is (561) 805-8000. Unless the context provides otherwise, when we refer to the “Company,” “we,” “our,”
or “us” in this Annual Report, we are referring to PositiveID Corporation and its consolidated subsidiaries.
This
Annual Report on Form 10-K contains trademarks and trade names of other organizations and corporations.
Available
Information
We
file or furnish with or to the Securities and Exchange Commission (“SEC”) our quarterly reports on Form 10-Q, annual
reports on Form 10-K, current reports on Form 8-K, annual reports to stockholders and annual proxy statements and amendments to
such filings. Our SEC filings are available to the public on the SEC’s website at http://www.sec.gov. These reports are
also available free of charge on our website at http://www.psidcorp.com as soon as reasonably practicable after we electronically
file or furnish such material with or to the SEC. The information on our website is not incorporated by reference into this Annual
Report or any registration statement that incorporates this Annual Report by reference.
Our
Business
We
are a life sciences and technology company focused primarily on the healthcare, homeland security and specialty vehicle markets.
Within our detection and diagnostics business, we specialize in the development of microfluidic systems for the automated preparation
of and performance of biological assays to detect biological threats and analyze biological samples at the point of need. Thermomedics
markets the Caregiver non-contact thermometer to the professional healthcare market. Our ENG subsidiary manufactures specialty
technology vehicles with a focus on mobile labs. PositiveID has a substantial portfolio of intellectual property related primarily
to sample preparation and rapid medical testing applications, and the Caregiver non-contact thermometer.
Since
its inception, we have received U.S. government grants and contracts,
primarily from the Department of Homeland Security (“DHS”). We have submitted, or are in the process of submitting,
bids on various potential U.S. government contracts.
M-BAND
Our
M-BAND technology, developed under contract with the U.S. DHS Science & Technology directorate, is a bio-aerosol monitor with
fully integrated systems for sample collection, processing and detection modules. M-BAND continuously and autonomously analyzes
air samples for the detection of pathogenic bacteria, viruses, and toxins for up to 30 days. Results from individual M-BAND instruments
are reported via a secure wireless network in real time to give an accurate and up-to-date status of field conditions. M-BAND
performs high specificity detection for up to six organisms on the Centers for Disease Control’s category A and B select
agents list. Further, we believe M-BAND was developed in accordance with DHS guidelines.
In
December 2012, the Company entered into a Sole and Exclusive License Agreement (the “Boeing License Agreement”), a
Teaming, (the “Teaming Agreement”) and a security agreement (the “Boeing Security Agreement”), with The
Boeing Company (“Boeing”). The Boeing License Agreement provides Boeing the exclusive license to sell PositiveID’s
M-BAND airborne bio-threat detector for the DHS BioWatch next generation opportunity, as well as other opportunities (government
or commercial) that may arise in the North American market. As consideration for entry into the Boeing License Agreement, Boeing
paid a license fee of $2.5 million (the “Boeing License Fee”) to the Company in three installments, which were paid
in full during 2012 and 2013 and was recognized as revenue during the year ended December 31, 2015. Under the Teaming Agreement,
which has now expired, and subject to certain conditions, the Company retained the exclusive rights to serve as the reagent and
assay supplier of M-BAND systems to Boeing. The Company also retained all rights to sell M-BAND units, reagents and assays in
international markets. Pursuant to the Boeing Security Agreement, the Company granted Boeing a security interest in all of its
assets, including the licensed products and intellectual property rights (as defined in the Boeing License Agreement), to secure
the Company’s performance under the Boeing License Agreement.
FireflyDX
Our
FireflyDX system is designed to deliver molecular diagnostic results from a sample in less than 30 minutes, which, we believe,
would enable accurate diagnostics leading to more rapid and effective treatment than what is currently available with existing
systems. The FireflyDX breadboard prototype system has already demonstrated the ability to detect and identify common pathogens
and diseases such as E. coli, Methicillin-resistant Staphylococcus Aureus, Methicillin-susceptible Staphylococcus Aureus, Clostridium
difficile, Zika virus, Ebola virus, influenza and others. FireflyDX is designed to be a simple-to-use, point-of-care, real-time
polymerase chain reaction (“PCR”) device, for use by medical personnel at the point-of-need; first response teams
to detect biological agents associated with weapons of mass destruction; agricultural screening in domestic sectors and developing
countries; and point-of-need monitoring of pathogenic outbreaks.
We
have demonstrated in our labs that the entire FireflyDX prototype design functions as intended through the complete sample purification
and detection process without the use of any third-party hardware. The next step in the development of FireflyDX is to combine
these processes and breadboards into single units and demonstrate the capability to run a test from putting the raw sample in
the cartridge through sample preparation, PCR and real-time detection as a single system. We are currently seeking a government
contract or a strategic or financial partner to help us fund the remaining development and the build of the smaller, field-able
prototype for testing by third parties to prepare for commercialization.
Caregiver
Caregiver
is an infrared thermometer, FDA-cleared for clinical use, that measures forehead temperature in adults, children and infants,
without contact. It delivers an oral-equivalent temperature directly from the forehead in one to two seconds. Caregiver is the
world’s first clinically validated, non-contact thermometer for the healthcare providers market, which includes hospitals,
physicians’ offices, medical clinics, nursing homes and other long-term care institutions, and acute care hospitals. Caregiver
requires minimal training and is proven as accurate as other methods of clinical thermometry, which include predictive oral/rectal/axillary
electronic, infrared tympanic, temporal artery contact scanner, etc. Other temperature monitoring devices may require intensive
technique concentration, which make them prone to mistaken placement or dwell time, and may require replacement metal probes,
cords, or other parts. Because there is no skin contact, we believe the Caregiver thermometer with TouchFree™ technology
is less likely to transmit infectious disease than devices that require even minimal contact. Caregiver saves medical facilities
the cost of probe covers (as much as $0.05 to $0.10 per temperature reading), storage space and disposal costs. It is estimated
that Caregiver can offer savings of $250 or more per year per device in probe cover supplies alone.
ENG
Mobile Systems
Our
ENG subsidiary is a leader in the specialty technology vehicle market, with a focus on mobile laboratories, command and communications
applications, and mobile cellular systems. The fastest growing segment of ENG’s business over the last decade is its mobile
labs, which include government and corporate laboratories for environmental, chemical, biological, nuclear, radiological and explosives
testing in the field. ENG’s MobiLab™ Systems have become the primary choice of mobile labs for scientific and environmental
agencies and organizations throughout the country because of their productivity in the field. ENG has delivered more than 400
MobiLabs to customers around the world. The combination of PositiveID’s expert bio-detection technologies with ENG’s
advanced mobile labs is expected to offer customers a next generation, best of breed solution in the mobile laboratory space.
ENG also provides specialty vehicle manufacturing for TV news vans and trucks, emergency response trailers,
mobile command centers, infrared inspection, and other special purpose vehicles. ENG provides technical support to customers’
field personnel through its training and educational programs, and also offers customizable service and maintenance agreements.
ENG’s mobile cellular systems offer temporary cell sites to boost capacity, as well as the latest technology for testing
site performance. During the past 25 years, ENG has pioneered numerous engineering and design breakthroughs, and has also incorporated
advanced technology in its service offerings.
Legacy
Products
Between
2011 and 2013, we entered into license or sale agreements to dispose of certain technologies concentrated in the area of diabetes
management and patient identification. Those products and their status are as follows:
VeriChip
and GlucoChip
Throughout
the course of 2012 to 2014, the Company and VeriTeQ, a business run by a former related party (CEO of the Company through 2011),
entered into a number of agreements for the intellectual property related to the Company’s embedded biosensor portfolio,
which ultimately resulted in a GlucoChip and a Settlement Agreement, entered into on October 20, 2014 (the “VeriTeQ Agreements”),
under which the final element of the Company’s implantable microchip business was sold to VeriTeQ.
Pursuant
to the VeriTeQ agreements, the Company holds a series of convertible notes that was received as payment for shared services payments
that the Company made on behalf of VeriTeQ during 2011 and 2012, and advances. As of December 31, 2017, the Company had outstanding
convertible notes receivable from VeriTeQ of $449,980, inclusive of accrued interest, and is also owed $541,175 of default principal
and interest for a total amount receivable of $991,155. All amounts owed from VeriTeQ are fully reserved in all periods presented.
The
Company also holds a five-year warrant dated November 13, 2013, with original terms entitling the Company to purchase 300,000
shares of VeriTeQ common stock at a price of $2.84 which expires November 13, 2018. Pursuant to the terms of the warrant,
in particular the full quantity and pricing reset provisions, the warrant had an original dollar value of $852,000 and can be
exercised using a cashless exercise feature. As of December 31, 2015, the Company exercised a portion of the warrant and recognized
a gain of $355,600. As of December 31, 2017, the Company holds approximately 256,960 warrants with a dollar value of $729,000.
The value of the warrant has also been fully reserved in all periods presented.
As
VeriTeQ is an idle company and not capitalized, the Company plans to continue to fully reserve all note receivable and warrant
balances. If and when proceeds are realized in the future, gains will be recognized.
Sales,
Marketing and Distribution
Our
sales, marketing and distribution plan for our healthcare products is to align with large medical distribution companies, and
either manufacture the products to their specification or license the products and underlying technology to them. We have entered
into various distribution agreements with several medical equipment suppliers to distribute our Caregiver thermometer. We will
also sell the Caregiver thermometer under separate agreements with commissioned independent sales representatives and smaller
distributors who have non-exclusive territorial agreements. ENG markets directly to customers through its internal sales force,
website, referrals and channel partners.
We
are subject to certain indemnification obligations in connection with our distribution agreements. We are usually required to
procure and maintain product liability insurance of specified limits per occurrence and in the aggregate, naming the contracting
party as an additional insured. Our distributors, resellers, and sales representatives typically agree not to sell competitive
products during the term of their agreements with us.
Manufacturing:
Distributor and Supplier Arrangements
We
have historically outsourced the manufacturing of all the hardware components of our systems to third parties. As of December
31, 2017, we have not had material difficulties obtaining system components. We believe that if any of our manufacturers or suppliers
were to cease supplying us with system components, we would be able to procure alternative sources without material disruption
to our business. We plan to continue to outsource any manufacturing requirements of our current and under-development products.
The
technology and functionality of the Caregiver thermometer was co-designed by our supplier in Taiwan, which, as discussed below,
is the manufacturer and the assignor to us of the requisite U.S. governmental pre-marketing approvals. We designed the housing
of our products, incorporating our extensive thermometry engineering and clinical expertise. We are in the process of designing
and developing, with our supplier, all aspects, including technology, of our proposed second-generation products.
Under
certain agreements, the Company may be subject to penalties if they are unable to supply products under its obligations. Since
inception, the Company has never incurred any such penalties.
Environmental
Regulation
We
must comply with local, state, federal, and international environmental laws and regulations in the countries in which we do business,
including laws and regulations governing the management and disposal of hazardous substances and wastes. We expect our operations
and products will be affected by future environmental laws and regulations, but we cannot predict the effects of any such future
laws and regulations at this time. Our distributors who place our products on the market in the European Union are required to
comply with EU Directive 2002/96/EC on waste electrical and electronic equipment, known as the WEEE Directive. Noncompliance by
our distributors with EU Directive 2002/96/EC would adversely affect the success of our business in that market. Additionally,
the applicability of EU Directive 2002/95/EC on the restriction of the use of certain hazardous substances in electrical and electronic
equipment, known as the RoHS Directive which took effect on July 1, 2006 does not impact our business.
Government
Regulation
Regulation
by the FDA
The
thermometers that we market are subject to regulation by numerous regulatory bodies, including the FDA and comparable international
regulatory agencies. These agencies require manufacturers of medical devices, such as our manufacturer, to comply with applicable
laws and regulations governing the development, testing, manufacturing, labeling, marketing and distribution of medical devices.
In addition, the Quality Management System employed by our contract manufacturer must meet the FDA 21 CFR Part 820, and its manufacturing
facility is subject to periodic FDA audit. Devices are generally subject to varying levels of regulatory control, the most comprehensive
of which requires that a clinical evaluation be conducted before a device receives approval for commercial distribution. Our products
are subject to the lowest level of regulation and only require pre-marketing approval, as described below.
In
the United States, permission to distribute a new device generally can be met in one of three ways. The process relevant to our
products requires that a pre-market notification (“510(k) Submission”) be made to the FDA to demonstrate that the
device is as safe and effective as, or substantially equivalent to, a legally marketed device that is not subject to pre-market
approval (“PMA”), i.e., the “predicate” device. An appropriate predicate device for a pre-market notification
is one that (i) was legally marketed prior to May 28, 1976, (ii) was approved under a PMA but then subsequently reclassified from
class III to class II or I, or (iii) has been found to be substantially equivalent and cleared for commercial distribution under
a 510(k) Submission. Applicants must submit descriptive data and, when necessary, performance data to establish that the device
is substantially equivalent to a predicate device. (In some instances not relevant to our products, data from human clinical trials
must also be submitted in support of a 510(k) Submission. The FDA must issue an order finding substantial equivalence before commercial
distribution can occur. Changes to existing devices covered by a 510(k) Submission that do not raise new questions of safety or
effectiveness can generally be made without additional 510(k) Submissions. More significant changes, such as new designs or materials,
may require a separate 510(k) with data to support that the modified device remains substantially equivalent. The FDA has recently
begun to review its clearance process in an effort to make it more rigorous, which may require additional clinical data, time
and effort for product clearance.
We
have received a 510(k) pre-market approval from the FDA for our thermometers. This 510(k) will allow us to sell our second- generation
thermometers without additional approvals. However, we may need to obtain recertification. Depending on product changes, this
recertification may require a complete documentation package, an abbreviated documentation package or an internal documentation
package, a determination to be made by guidance documents from the FDA, in concert with our regulatory consultants.
Some
countries do not have medical device regulations, but in most foreign countries medical devices are regulated. Frequently, regulatory
approval may first be obtained in a foreign country prior to application in the United States to take advantage of differing regulatory
requirements. If we market in foreign countries, such as the European countries, ISO 13485 is the internationally recognized standard
for medical devices. Products must comply with ISO 13485 to receive the “CE” mark. We design our products to comply
with the requirements of both the FDA and ISO 13485. We intend to conduct audits of our contract manufacturers to ensure compliance
with these regulations. If an audit uncovers problems, there is a risk of disruption in product availability.
Upon
the completion of development, we intend to apply for a Clinical Laboratory Improvement Amendments (“CLIA”) waiver
from the FDA to market FireflyDX.
CLIA
Waiver.
Congress passed the CLIA in 1988 establishing quality standards for all laboratory testing to ensure the accuracy,
reliability and timeliness of patient test results regardless of where the test was performed. The requirements are based on the
complexity of the test and not the type of laboratory where the testing is performed. As defined by CLIA, waived tests are categorized
as “simple laboratory examinations and procedures that have an insignificant risk of an erroneous result.” The FDA
determines the criteria for tests being simple with a low risk of error and approves manufacturer’s applications for test
system waiver.
FDA
Premarket Clearance and Approval Requirements
. Generally speaking, unless an exemption applies such as applying for a CLIA
waiver, each medical device we wish to distribute commercially in the United States will require either prior clearance under
Section 510(k) of the Federal Food, Drug, and Cosmetic Act, (“FFDCA”), or a PMA, approved by the FDA. Medical devices
are classified into one of three classes — Class I, Class II or Class III — depending on the degree of risk to the
patient associated with the medical device and the extent of control needed to ensure its safety and effectiveness. Devices deemed
to pose low or moderate risks are placed in either Class I or II, respectively. The manufacturer of a Class II device is required
to submit to the FDA a premarket notification requesting permission to commercially distribute the device and demonstrating that
the proposed device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution
before May 28, 1976 for which the FDA has not yet called for the submission of a PMA. This process is known as 510(k) clearance.
Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting implantable devices, or devices
deemed not substantially equivalent to a previously cleared 510(k) device, are considered high risk and placed in Class III, requiring
premarket approval.
Pervasive
and Continuing Regulation
. After a medical device is placed on the market, numerous regulatory requirements continue to apply.
These include:
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quality
system regulations, (“QSR”), which require manufacturers, including third-party manufacturers, to follow stringent
design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;
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labeling
regulations and FDA prohibitions against the promotion of regulated products for uncleared, unapproved or off-label uses;
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clearance
or approval of product modifications that could significantly affect safety or effectiveness or that would constitute a major
change in intended use;
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medical
device reporting, (“MDR”), regulations, which require that a manufacturer report to the FDA if the manufacturer’s
device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute
to a death or serious injury if the malfunction were to recur;
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post-market
surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness
data for the device; and
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medical
device tracking requirements apply when the failure of the device would be reasonably likely to have serious adverse health
consequences.
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Fraud
and Abuse
We
are subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and false
claims laws. Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, imprisonment
and exclusion from participation in federal and state healthcare programs, including Medicare, Medicaid and Veterans Affairs health
programs. We have never been challenged by a government authority under any of these laws and believe that our operations are
in material compliance with such laws. However, because of the far-reaching nature of these laws, there can be no assurance that
we would not be required to alter one or more of our practices to be in compliance with these laws. In addition, there can be
no assurance that the occurrence of one or more violations of these laws would not result in a material adverse effect on our
financial condition and results of operations.
Anti-Kickback
Laws
We
may directly or indirectly be subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback
laws. In particular, the federal healthcare program Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an
individual, or the furnishing, arranging for or recommending a good or service, for which payment may be made in whole or part
under federal healthcare programs, such as the Medicare and Medicaid programs. Penalties for violations include criminal penalties
and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs.
Federal
False Claims Act
We
may become subject to the Federal False Claims Act (“FCA”). The FCA imposes civil fines and penalties against anyone
who knowingly submits or causes to be submitted to a government agency a false claim for payment. The FCA contains so-called “whistle-blower”
provisions that permit a private individual to bring a claim, called a qui tam action, on behalf of the government to recover
payments made as a result of a false claim. The statute provides that the whistle-blower may be paid a portion of any funds recovered
as a result of the lawsuit.
State
Laws and Regulations
Many
states have enacted laws similar to the federal Anti-Kickback Statute and FCA. The Deficit Reduction Act of 2005 contains provisions
that give monetary incentives to states to enact new state false claims acts. The state Attorneys General are actively engaged
in promoting the passage and enforcement of these laws. While the Federal Anti-Kickback Statute and FCA apply only to federal
programs, many similar state laws apply both to state funded and to commercial health care programs. In addition to these laws,
all states have passed various consumer protection statutes. These statutes generally prohibit deceptive and unfair marketing
practices, including making untrue or exaggerated claims regarding consumer products. There are potentially a wide variety of
other state laws, including state privacy laws, to which we might be subject. We have not conducted an exhaustive examination
of these state laws.
Laws
and Regulations Governing Privacy and Security
There
are various federal and state laws and rules regulating the protection of consumer and patient privacy. We have never been challenged
by a governmental authority under any of these laws and believe that our operations are in material compliance with such laws.
However, because of the far-reaching nature of these laws, there can be no assurance that we would not be required to alter one
or more of our systems and data security procedures to be in compliance with these laws. Our failure to protect health information
received from customers could subject us to civil or criminal liability and adverse publicity and could harm or business and impair
our ability to attract new customers.
U.S.
Federal Trade Commission Oversight
An
increasing focus of the United States Federal Trade Commission’s (the “FTC”), consumer protection regulation
is the impact of technological change on protection of consumer privacy. Under the FTC’s statutory authority to prosecute
unfair or deceptive acts and practices, the FTC vigorously enforces promises a business makes about how personal information is
collected, used and secured.
Since
1999, the FTC has taken enforcement action against companies that do not abide by their representations to consumers of electronic
security and privacy. More recently, the FTC has found that failure to take reasonable and appropriate security measures to protect
sensitive personal information is an unfair practice violating federal law. In the consent decree context, offenders are routinely
required to adopt very specific cyber security and internal compliance mechanisms, as well as submit to twenty years of independent
compliance audits. Businesses that do not adopt reasonable and appropriate data security controls or that misrepresent privacy
assurances to users have been subject to civil penalties as high as $22.5 million.
In
2009, the FTC issued rules requiring vendors of personal health records to notify customers of any breach of unsecured, individually
identifiable health information. Also, a third-party service provider of such vendors or entities that experiences a breach must
notify such vendors or entities of the breach. If we experience a breach of our systems containing personal health records, we
will be required to provide these notices and may be subject to penalties. Violations of these requirements may be prosecuted
by the FTC as an unfair or deceptive act or practice and could result in significant harm to our reputation.
Health
Insurance Portability and Accountability Act of 1996 and the Health Information Technology for Economic and Clinical Health Act
of 2009
The
Health Insurance Portability and Accountability Act of 1996 and its implementing regulations (“HIPAA”), govern how
various entities and individuals can use and disclose protected health information. If we begin transmitting individually identifiable
health information in connection with certain standard transactions regulated by HIPAA, we would likely have to implement a HIPAA
compliance program to ensure our uses and disclosures of health information are done in accordance with the regulations. Under
the federal Health Information Technology for Economic and Clinical Health Act, (the “HITECH Act”), we may be subject
to certain federal privacy and security requirements relating to individually identifiable health information we maintain. We
may be required to enter into written business associate agreements with certain health care providers and health plans relating
to the privacy and security of protected health information, to the extent our customers are covered entities under HIPAA and
to the extent we receive, use or disclose protected health information on their behalf. Under the HITECH Act, we would be required
by federal law to comply with those business associate agreements, as well as certain privacy and security requirements found
in HIPAA and the HITECH Act as they relate to our activities as a business associate. If we are a covered entity or business associate
under HIPAA and the HITECH Act, compliance with those requirements would require us to, among other things, conduct a risk analysis,
implement a risk management plan, implement policies and procedures, and conduct employee training. The HITECH Act would also
require us to notify patients or our customers, to the extent that they are covered entities subject to HIPAA, of a breach of
privacy or security of individually identifiable health information. Breaches may also require notification to the Department
of Health and Human Services and the media. Experiencing a breach could have a material impact on our reputation. The standards
under HIPAA and the HITECH Act could be interpreted by regulatory authorities in ways that could require us to make material changes
to our operations. Failure to comply with these federal privacy and security laws could subject us to civil and criminal penalties.
Civil penalties can go as high as $50,000 per violation, with an annual maximum of $1.5 million for all violations of an identical
provision in a calendar year.
State
Legislation
Many
states have privacy laws relating specifically to the use and disclosure of healthcare information. Federal healthcare privacy
laws may preempt state laws that are less restrictive or offer fewer protections for healthcare information than the federal law
if it is impossible to comply with both sets of laws. More restrictive or protective state laws still may apply to us, and state
laws will still apply to the extent that they are not contrary to federal law. Therefore, we may be required to comply with one
or more of these multiple state privacy laws. Statutory penalties for violation of these state privacy laws varies widely. Violations
also may subject us to lawsuits for invasion of privacy claims, or enforcement actions brought by state Attorneys General. We
have not conducted an exhaustive examination of these state laws.
Many
states currently have laws in place requiring organizations to notify individuals if there has been unauthorized access to certain
unencrypted personal information. Several states also require organizations to notify the applicable state Attorney General or
other governmental entity in the event of a data breach and may also require notification to consumer reporting agencies if the
number of individuals involved surpasses a defined threshold. We may be required to comply with one or more of these notice of
security breach laws in the event of unauthorized access to personal information. In addition to statutory penalties for a violation
of the notice of security breach laws, we may be exposed to liability from affected individuals.
Regulation
of Government Bid Process and Contracting
Contracts
with federal governmental agencies are obtained by primarily through a competitive proposal/bidding process. Although practices
vary, typically a formal Request for Proposal is issued by the governmental agency, stating the scope of work to be performed,
length of contract, performance bonding requirements, minimum qualifications of bidders, selection criteria and the format to
be followed in the bid or proposal. Usually, a committee appointed by the governmental agency reviews proposals and makes an award
determination. The committee may award the contract to a particular bidder or decide not to award the contract. The committees
consider a number of factors, including the technical quality of the proposal, the offered price and the reputation of the bidder
for providing quality care. The award of a contract may be subject to formal or informal protest by unsuccessful bidders through
a governmental appeals process. Our contracts with governmental agencies often require us to comply with numerous additional requirements
regarding recordkeeping and accounting, non-discrimination in the hiring of personnel, safety, safeguarding confidential information,
management qualifications, professional licensing requirements and other matters. If a violation of the terms of an applicable
contractual provision occurs, a contractor may be disbarred or suspended from obtaining future contracts for specified periods
of time. We have never been disbarred or suspended from seeking procurements by any governmental agency.
Risk
Management
The
testing, marketing and sale of human healthcare products entails an inherent risk of product liability claims. In the normal course
of business, product liability claims may be asserted against us in the future related to events unknown at the present time.
We have obtained and maintain insurance with respect to product liability claims in amounts we believe are appropriate. However,
product liability claims, product recalls, litigation in the future, regardless of outcome, could have a material adverse effect
on our business. We believe that our risk management practices are reasonably adequate to protect against reasonable product liability
losses. However, unanticipated catastrophic losses could have a material adverse impact on our financial position, results of
operations and liquidity.
Competitive
Conditions
We
compete with many companies in the molecular diagnostics industry and the homeland defense and clinical markets. We believe that
Luminex Corporation, Cepheid, Roche, BioMerieux, and Thermo Fisher Scientific will be competitors for our molecular diagnostics
products. We believe Welch Allyn, Braun and Exergen, which markets a line of oral, infrared, tympanic and axillary thermometers,
is our main competitor in the clinical-use thermometry market. In our ENG business, we believe our competitors include GermFree
Laboratories, Inc., LDV Inc., and Farber Specialty Vehicles.
Key
characteristics of our markets include long operating cycles and intense competition, which is evident through the number of bid
protests (competitor protests of U.S. government procurement awards) and the number of competitors bidding on program opportunities.
It is common in the homeland defense industry for work on major programs to be shared among several companies. A company competing
to be a prime contractor may, upon ultimate award of the contract to another competitor, become a subcontractor for the ultimate
prime contracting company. It is not unusual to compete for a contract award with a peer company and, simultaneously, perform
as a supplier to, or a customer of, that same competitor on other contracts, or vice versa.
Research
and Development
The
principal objectives of our research and development program are to develop high-value molecular diagnostic products such as FireflyDX
and M-BAND, as well as to improve the accuracy of our thermometer products so that we can complete development of and introduce
our next-generation line of human thermometers to healthcare professionals and institutions. We focus our efforts on five main
areas: 1) engineering efforts to extend the capabilities of our systems and to develop new systems; 2) assay development efforts
to design, optimize and produce specific tests that leverage the systems and chemistry we have developed; 3) target discovery
research to identify novel micro RNA targets to be used in the development of future assays; 4) chemistry research to develop
innovative and proprietary methods to design and synthesize oligonucleotide primers, probes and dyes to optimize the speed, performance
and ease-of-use of our assays; and 5) developing hardware and software for all our new thermometer models, and further clinical
studies for validation.
Authorized
Common Stock and Reverse Stock Split
On
January 30, 2017, the Company filed the First Amendment to the Company’s Third Amended and Restated Certificate of Incorporation
with the State of Delaware, to increase the Company’s authorized capital stock from 3.9 billion shares to 20 billion shares
(19.995 billion common) and to change the par value of the Company’s common stock from $0.001 to $0.0001.
On
May 19, 2017, the Company filed the Second Amendment to the Third Amended and Restated Certificate of Incorporation, as amended,
with the State of Delaware, to implement a 1-for-3,000 reverse stock split of the Company’s outstanding common stock, which
became effective on May 23, 2017. The reverse stock split affected the outstanding common stock as well as all common stock underlying
convertible notes, warrants, convertible preferred stock and stock options outstanding immediately prior to the reverse stock
split. The number of authorized shares was not adjusted. All share and per share amounts in this Annual Report have been retroactively
adjusted to reflect the change in the par value of the Common Stock and the 1-for-3,000 reverse stock split.
On
December 27, 2017, the Company received (i) a written consent in lieu of a meeting of Stockholders (the “Written Consent”)
from holders of shares of voting securities representing approximately 78% of the total issued and outstanding shares of voting
stock of the Company; and (ii) a unanimous written consent of the Board of Directors (the “Board”) to approve the
following: the granting of discretionary authority to the Board, at any time for a period of 12 months after the date of the Written
Consent, to authorize the adoption of an amendment to the Company’s Third Amended and Restated Certificate of Incorporation,
as amended (the “Certificate of Incorporation”), to effect a reverse stock split of the Company’s common stock
at a ratio between 1 for 100 to 1 for 1,000, such ratio to be determined by the Board, or to determine not to proceed with the
reverse stock split (the “Reverse Stock Split”); and the granting of discretionary authority to the Board for a period
of 12 months after the date of the Written Consent, to authorize the adoption of an amendment to the Certificate of Incorporation
to decrease the Company’s authorized capital stock, from 20,000,000,000 shares down to an amount not less than 50,000,000
shares, such decrease to be determined by the Board, or to determine not to proceed with the decrease in authorized capital stock
(the “Decrease in Authorized Shares”). As of the date of this Annual Report, the Company had not effected the Reverse
Stock Split or the Decrease in Authorized Shares.
Employees
As
of March 16, 2018, PositiveID, Thermomedics and ExcitePCR had a total of 9 full-time employees, of which 3 were in management;
2 were in finance and administration; 2 were in sales, marketing and business development; and 2 were in research, development
and engineering. As of March 16, 2018, ENG had a total of 21 full-time employees, of which 1 was in management; 1 was in finance
and administration; 2 were in sales, marketing and business development; 2 were in research, development and engineering; and
15 were in manufacturing. We consider our relationship with our employees to be satisfactory and have not experienced any interruptions
of our operations as a result of labor disagreements. None of our employees are represented by labor unions or covered by collective
bargaining agreements.
Item
1A. Risk Factors
The
following risks and the risks described elsewhere in this Annual Report on Form 10-K, including the section entitled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” could materially affect our business, prospects,
financial condition, operating results and cash flows. If any of these risks materialize, the trading price of our common stock
could decline, and you may lose all or part of your investment.
Risks
Related to the Operations and Business of PositiveID
We
have a history of losses and expect to incur additional losses in the future. We are unable to predict the extent of future losses
or when we will become profitable
.
For
the years ended December 31, 2017 and 2016, we experienced net losses of $8.7 million and $13.1 million, respectively and
our accumulated deficit at December 31, 2017 was $165.8 million. Until our ENG, Caregiver, Firefly and M-BAND businesses
and products are profitable on a combined basis, we do not anticipate generating significant operating profits. We have submitted,
or are in the process of submitting, bids on various potential new U.S. Government contracts; however, there can be no assurance
that we will be successful in obtaining any such new or other contracts.
We
expect to continue to incur operating losses for the near future. Our ability in the future to achieve or sustain profitability
is based on a number of factors, many of which are beyond our control. Even if we achieve profitability in the future, we may
not be able to sustain profitability in subsequent periods.
We
may be unable to successfully close the ExcitePCR transaction and, if we do not, we may be unable to further develop the Firefly
Technology.
We
believe that the Firefly Technology has significant potential value to stockholders. As a condition to our obligation to close
the APA, ExcitePCR shall have completed a financing transaction with net proceeds to ExcitePCR of at least $3 million. Additional
conditions and deliverables at closing include a patent assignment agreement, accounting services agreement, license agreement,
and certain required consents from third parties. As of December 31, 2017, ExcitePCR and the Company had not yet closed the transaction.
The
parties have entered into the APA so ExcitePCR can secure financing and then independently pursue the development, improvement
and commercialization of the Firefly Technology. If we are unable to close the transaction with ExcitePCR, we may unable to further
develop the Firefly Technology due to potential partners and/or investors key to the completion and commercialization of the Firefly
Technology preferring to not partner with a highly leveraged company such as ours. Our failure to develop the Firefly Technology
could have a material adverse effect on our business, financial condition, or results of operations.
Our
financial statements indicate conditions exist that raise substantial doubt as to whether we will continue as a going concern.
Our
annual audited financial statements for the years ended December 31, 2017 and 2016 indicate conditions that exist that
raise substantial doubt as to whether we will continue as a going concern. Our continuation as a going concern is dependent upon
our ability to obtain financing to fund the continued development of products and working capital requirements. If we cannot continue
as a going concern, our stockholders may lose their entire investment.
Government
contracts and subcontracts are generally subject to a competitive bidding process that may affect our ability to win contract
awards or renewals in the future.
We
bid on government contracts through a formal competitive process in which we may have many competitors. If awarded, upon expiration,
these contracts may be subject, once again, to a competitive renewal process if applicable. We may not be successful in winning
contract awards or renewals in the future. Our failure to renew or replace existing contracts when they expire could have a material
adverse effect on our business, financial condition, or results of operations.
Contracts
and subcontracts with United States government agencies that we may be awarded will be subject to competition and will be awarded
on the basis of technical merit, personnel qualifications, experience, and price. Our business, financial condition, and results
of operations could be materially affected to the extent that U.S. government agencies believe our competitors offer a more attractive
combination of the foregoing factors. In addition, government demand and payment for our products may be affected by public sector
budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting demand for our products. Our
success in this process is an important factor in our ability to increase stockholder value.
Compliance
with changing regulations concerning corporate governance and public disclosure may result in additional expenses.
There
have been changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley
Act, and new regulations promulgated by the SEC. These new or changed laws, regulations and standards are subject to varying interpretations
in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and
higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with
evolving laws, regulations and standards are likely to continue to result in increased general and administrative expenses and
a diversion of management time and attention from revenue-generating activities to compliance activities. Our board members and
executive officers could face an increased risk of personal liability in connection with the performance of their duties. As a
result, we may have difficulty attracting and retaining qualified board members and executive officers, which could harm our business.
If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory
or governing bodies, we could be subject to liability under applicable laws or our reputation may be harmed.
Changes
in the regulatory environment could adversely affect our business, financial condition or results of operations.
Our
operations are subject to varying degrees of regulation by the FDA, other federal, state and local regulatory agencies and legislative
bodies. Adverse decisions or new or amended regulations or mandates adopted by any of these regulatory or legislative bodies could
negatively impact our operations by, among other things, causing unexpected or changed capital investments, lost revenues, increased
costs of doing business, and could limit our ability to engage in certain sales or marketing activities.
We
depend on key personnel to manage our business effectively, and, if we are unable to hire, retain or motivate qualified personnel,
our ability to design, develop, market and sell our systems could be harmed.
Our
future success depends, in part, on certain key employees, including William J. Caragol, our Chairman of the Board and Chief Executive
Officer and Lyle Probst, our President, and on our ability to attract and retain highly skilled personnel. The loss of the services
of any of our key personnel may seriously harm our business, financial condition and results of operations. In addition, the inability
to attract or retain qualified personnel, or delays in hiring required personnel, particularly operations, finance, accounting,
sales and marketing personnel, may also seriously harm our business, financial condition and results of operations. Our ability
to attract and retain highly skilled personnel will be a critical factor in determining whether we will be successful in the future.
We
may be unable to make or successfully integrate acquisitions.
Our
business and growth strategies depend in large part on our ability to identify and acquire suitable companies. Delays or failures
in acquiring new companies would materially and adversely affect our planned growth.
Strategic
acquisitions, investments and alliances are intended to expand our ability to offer, high quality detection and diagnostic products
and services. If we are unsuccessful in our acquisitions, investments and alliances, we may be unable to grow our business significantly
or may record asset impairment charges in the future. The success of any acquisition, investment or alliance that we may undertake
in the future will depend on a number of factors, including:
●
|
our
ability to identify suitable opportunities for acquisition, investment or alliance, if at all;
|
|
|
●
|
our
ability to finance any future acquisition, investment or alliance on terms acceptable to us, if at all;
|
|
|
●
|
whether
we are able to establish an acquisition, investment or alliance on terms that are satisfactory to us, if at all;
|
|
|
●
|
the
strength of the other company’s underlying technology and ability to execute;
|
|
|
●
|
intellectual
property and pending litigation related to these technologies;
|
|
|
●
|
regulatory
approvals and reimbursement levels, if any, of the acquired products, if any; and
|
|
|
●
|
our
ability to successfully integrate acquired companies and businesses with our existing business, including the ability to adequately
fund acquired in-process research and development projects.
|
Any
potential future acquisitions we consummate will be dilutive, possibly substantially, to the equity ownership interests of our
shareholders since we intend to pay for such acquisitions by issuing shares of our common stock, and also may be dilutive to our
earnings per share, if any.
Our
acquisition strategy may not have the desired result, and notwithstanding effecting numerous acquisitions, we still may be unable
to achieve profitability or, if profitability should be achieved, to sustain it.
We
will continue to incur the expenses of complying with public company reporting requirements.
We
have an obligation to continue to comply with the applicable reporting requirements of the Exchange Act, which includes the filing
with the SEC of periodic reports, proxy statements and other documents relating to our business, financial conditions and other
matters, even though compliance with such reporting requirements is economically burdensome at this time.
Directors,
executive officers, principal stockholders and affiliated entities own a significant percentage of our capital stock, and they
may make decisions that you do not consider to be in the best interests of our stockholders.
As
of March 16, 2018, our current named directors and executive officers beneficially owned, in the aggregate, approximately 65.7%
of our outstanding voting securities, including 28.3% owned by our Chairman of the Board and Chief Executive Officer. As a result,
if some, or all of them acted together, they would have the ability to exert substantial influence over the election of the Board
and the outcome of issues requiring approval by our stockholders. This concentration of ownership may also have the effect of
delaying or preventing a change in control of the Company that may be favored by other stockholders. This could prevent transactions
in which stockholders might otherwise recover a premium for their shares over current market prices.
The
Company’s officers, directors and management hold preferred shares that give them voting control of the Company.
From
September 30, 2013 through April 6, 2016, the Company issued 2,025 shares of Series I Preferred Stock to its officers, directors
and management as management and director compensation and payment of deferred obligations. Each of the Series I preferred is
convertible into the Company’s Common Stock, at stated value plus accrued dividends, at the closing bid price on the issuance
date, any time at the option of the holder and by the Company in the event that the Company’s closing stock price exceeds
400% of the conversion price for twenty consecutive trading days. The Series I Preferred Stock had voting rights equivalent to
twenty-five votes per common share equivalent.
On
July 25, 2016, the Board authorized a Certificate of Designations of Preferences, Rights and Limitations of Series II Convertible
Preferred Stock (the “Certificate”). The Certificate was filed with the State of Delaware Secretary of State on July
25, 2016. The Series II Preferred ranks: (a) senior with respect to dividends and right of liquidation with the common stock;
(b) pari passu with respect to dividends and right of liquidation with the Company’s Series I Preferred and Series J Convertible
Preferred Stock; and (c) junior to all existing and future indebtedness of the Company. The Series II Preferred has a stated value
per share of $1,000, subject to adjustment as provided in the Certificate (the “Stated Value”), and a dividend rate
of 6% per annum of the Stated Value. As with the Series I Preferred, the Series II Preferred has 25 votes per common share equivalent.
The Series II Preferred is subject to redemption (at Stated Value, plus any accrued, but unpaid dividends (the “Liquidation
Value”)) by the Company no later than three years after a Deemed Liquidation Event (as defined in the Certificate) and at
the Company’s option after one year from the issuance date of the Series II Preferred, subject to a ten-day notice (to allow
holder conversion). The Series II Preferred is convertible at the option of a holder or if the closing price of the common stock
exceeds 400% of the Conversion Price for a period of twenty consecutive trading days, at the option of the Company. Conversion
Price means a price per share of the common stock equal to 100% of the lowest daily volume weighted average price of the common
stock during the subsequent 12 months following the date the Series II Preferred was issued.
On
August 11, 2016, the Board of PositiveID agreed to exchange 2,025 shares of its Series I Preferred, which have a stated value
of $2,025,000 and redemption value of $2,261,800 for 2,262 shares of Series II Preferred, which have a stated value of $2,262,000,
held by its directors, officers and management, namely, our CEO, acting CFO and Chairman, William J. Caragol, our President, Lyle
L. Probst, and our three non-employee directors, Jeffrey Cobb, Michael Krawitz, and Ned L. Siegel, as well as Allison Tomek, our
Senior Vice President of Corporate Development, and Kimothy Smith, the Chief Scientific Officer of ExcitePCR (the “Exchange”).
The Series II have an aggregate stated value equivalent to the redemption value of the Series I at the exchange date. Pursuant
to the Exchange, each existing holder of Series I Preferred exchanged their Series I Preferred shares for Series II Preferred
shares having equivalent per share stated value, maintaining the same voting rights as they had as holders of the Series I Preferred.
Both the Series I Preferred and the Series II Preferred have a stated value per share of $1,000, and a dividend rate of 6% per
annum. All shares of Series I Preferred previously issued have become null and void and any and all rights arising thereunder
have been extinguished. The Series II Preferred is only forfeitable after the exchange date up to January 1, 2019 upon termination
for cause and is subject to acceleration in the event of conversion, redemption and certain events.
On
March 29, 2017, the Company, filed a Certificate of Elimination (the “Certificate of Elimination”) for its Series
I Convertible Preferred Stock (“Series I”) with the Delaware Secretary of State to eliminate from its Third Amended
and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), all references to the
Company’s Series I. No shares of the Series I were issued or outstanding upon filing of the Certificate of Elimination.
On
March 29, 2017, the Company filed an Amended Restated Certificate of Designations of Preferences, Rights and Limitations of Series
II Convertible Preferred Stock (the “Amended Certificate of Designation”). The Amended Certificate of Designation
was filed to increase the authorized shares of Series II Convertible Preferred Stock from 3,000 shares to 4,000 shares. No other
terms were modified or amended in the Amended Certificate of Designation.
On
March 29, 2017, the Company issued shares of Series II Preferred as follows: (i) 50 shares of Series II Preferred were issued
to each of three independent board members as a component of their 2017 compensation (150 shares total); and (ii) 685 shares of
Series II Preferred were issued to the Company’s management as a component of their 2016 incentive compensation at a stated
value of $1,000 per share. These Series II Preferred shares are only forfeitable up to January 1, 2019 upon termination for cause
and is subject to acceleration in the event of conversion, redemption and certain events.
As
of March 16, 2018, there were 3,097 shares of Series II Preferred shares issued and outstanding as detailed below:
|
|
|
|
Preferred Series II
|
|
Name
|
|
Position
|
|
Shares Issued
|
|
|
Common Shares Issuable
Upon Conversion
|
|
|
Total Votes
|
|
William J. Caragol
|
|
Chairman and Chief Executive Officer
|
|
|
1,327
|
|
|
|
190,947,859
|
|
|
|
4,773,696,469
|
|
Lyle Probst
|
|
President
|
|
|
706
|
|
|
|
150,272,781
|
|
|
|
3,756,819,524
|
|
Michael E. Krawitz
|
|
Director
|
|
|
219
|
|
|
|
35,150,403
|
|
|
|
878,760,082
|
|
Jeffrey S. Cobb
|
|
Director
|
|
|
204
|
|
|
|
34,167,913
|
|
|
|
854,197,837
|
|
Ned L. Siegel
|
|
Director
|
|
|
176
|
|
|
|
32,333,933
|
|
|
|
808,348,313
|
|
Allison F. Tomek
|
|
SVP of Corporate Development
|
|
|
266
|
|
|
|
59,034,924
|
|
|
|
1,475,873,088
|
|
Kimothy Smith
|
|
Chief Scientific Officer, ExcitePCR
|
|
|
55
|
|
|
|
3,602,463
|
|
|
|
90,061,565
|
|
Caragol Family Irrevocable Trust
|
|
|
|
|
59
|
|
|
|
3,864,460
|
|
|
|
96,611,497
|
|
Kent Murray
|
|
Former SVP Finance
|
|
|
75
|
|
|
|
36,121,527
|
|
|
|
903,038,182
|
|
Gary O’Hara
|
|
Chief Technology Officer, Thermomedics
|
|
|
10
|
|
|
|
4,816,204
|
|
|
|
120,405,091
|
|
Total
|
|
|
|
|
3,097
|
|
|
|
550,312,467
|
|
|
|
13,757,811,648
|
|
As
of March 16, 2018, per the above table, the Company
’
s
named executive officers and directors had aggregate control of 65.7% of the Company
’
s
voting shares out of which Mr. Caragol had control of 28.3% of the Company
’
s
voting shares. Our officers, directors and management (in addition to the five people who make up the Majority Stockholders, this
includes Allison Tomek, our Senior Vice President of Corporate Development, and Kimothy Smith, Chief Scientific Officer of ExcitePCR
and Kent Murray, former Senior Vice President of Finance) have an aggregate of 13,757,811,681 votes or 81.6% of the total vote,
on any matter brought to a vote of the holders of our common stock which includes 13,757,811,648 votes through the ownership of
Series II Preferred Stock and 33 votes through the ownership of shares of our common stock. As a result, our named officers, directors,
and management have voting control over the 16,855,952,735 of the outstanding voting shares of the Company which includes votes
through the ownership of Series II Preferred Stock and ownership of outstanding common shares.
Our
Board may, at any time, authorize the issuance of additional common or preferred stock without common stockholder approval, subject
only to the total number of authorized common and preferred shares set forth in our certificate of incorporation. The terms of
equity securities issued by us in future transactions may be more favorable to new investors, and may include dividend and/or
liquidation preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a
further dilutive effect. Since management has voting control over the Company, it also has the ability to approve any increase
in the amount of authorized shares of common or preferred stock thus, there are no limitations on management’s ability to
continue to make dilutive issuances of securities.
Risks
Related to Our Product Development Efforts
We
anticipate future losses and will require additional financing, and our failure to obtain additional financing when needed could
force us to delay, reduce or eliminate our product development programs or commercialization efforts.
We
anticipate future losses and therefore may be dependent on additional financing to execute our business plan. In particular, we
will require additional capital to continue to conduct the research and development and obtain regulatory clearances and approvals
necessary to bring our products to market and to establish effective marketing and sales capabilities for existing and future
products. Our operating plan may change, and we may need additional funds sooner than anticipated to meet our operational needs
and capital requirements for product development, clinical trials and commercialization. Additional funds may not be available
when we need them on terms that are acceptable to us, or at all. If adequate funds are not available on a timely basis, we may
terminate or delay the development of one or more of our products, or delay establishment of sales and marketing capabilities
or other activities necessary to commercialize our products.
Our
future capital requirements will depend on many factors, including: the research and development of our molecular diagnostic products,
the costs of expanding sales and marketing infrastructure and manufacturing operations; the number and types of future products
we develop and commercialize; the costs, timing and outcomes of regulatory reviews associated with our current and future product
candidates; the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual
property-related claims; and the extent and scope of our general and administrative expenses.
Our
industry changes rapidly as a result of technological and product developments, which may quickly render our product candidates
less desirable or even obsolete. If we are unable or unsuccessful in supplementing our product offerings, our revenue and operating
results may be materially adversely affected.
The
industry in which we operate is subject to rapid technological change. The introduction of new technologies in the market, including
the delay in the adoption of these technologies, as well as new alternatives for the delivery of products and services will continue
to have a profound effect on competitive conditions in this market. We may not be able to develop and introduce new products,
services and enhancements that respond to technological changes on a timely basis. If our product candidates are not accepted
by the market as anticipated, if at all, our business, operating results, and financial condition may be materially and adversely
affected.
Industry
and Business Risks Related to E-N-G Mobile Systems, Inc.
We
expect a number of factors to cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult
to predict our future performance.
Our
revenues and operating results could vary significantly from quarter to quarter and year-to-year because of a variety of factors,
many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be
meaningful. In addition to other risk factors discussed in this section, factors that may contribute to the variability of our
quarterly and annual results include:
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our
ability to accurately forecast revenues and appropriately plan our expenses;
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●
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the
impact of worldwide economic conditions, including the resulting effect on consumer spending;
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our
ability to maintain an adequate rate of growth;
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our
ability to effectively manage our growth;
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our
ability to attract new customers;
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●
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our
ability to successfully enter new markets and manage our expansion;
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●
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the
effects of increased competition in our business;
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our
ability to keep pace with changes in technology and our competitors;
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our
ability to successfully manage any future acquisitions of businesses, solutions or technologies;
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the
success of our marketing efforts;
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interruptions
in service and any related impact on our reputation;
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the
attraction and retention of qualified employees and key personnel;
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our
ability to protect our intellectual property;
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costs
associated with defending intellectual property infringement and other claims;
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●
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the
effects of natural or man-made catastrophic events;
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the
effectiveness of our internal controls; and
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changes
in government regulation affecting our business.
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As
a result of these and other factors, the results of any prior quarterly or annual periods should not be relied upon as indications
of our future operating performance, and any unfavorable changes in these or other factors could have a material adverse effect
on our business, financial condition and results of operation.
We
may face strong competition from larger, established companies.
We
likely will face intense competition from other companies that provide the same or similar custom specialty vehicle manufacturing
and other services that compete with acquired businesses, virtually all of which can be expected to have longer operating histories,
greater name recognition, larger installed customer bases and significantly more financial resources, R&D facilities and manufacturing
and marketing experience than we have. There can be no assurance that developments by our potential competitors will not render
our existing and future products or services obsolete. In addition, we expect to face competition from new entrants into the custom
specialty vehicle business. As the demand for products and services grows and new markets are exploited, we expect that competition
will become more intense, as current and future competitors begin to offer an increasing number of diversified products and services.
We may not have sufficient resources to maintain our research and development, marketing, sales and customer support efforts on
a competitive basis. Additionally, we may not be able to make the technological advances necessary to maintain a competitive advantage
with respect to our products and services. Increased competition could result in price reductions, fewer product orders, obsolete
technology and reduced operating margins, any of which could materially and adversely affect our business, financial condition
and results of operations.
Growth
may place significant demands on our management and our infrastructure.
We
plan for substantial growth in our business, and this growth would place significant demands on our management and our operational
and financial infrastructure. If our operations grow in size, scope and complexity, we will need to improve and upgrade our systems
and infrastructure to meet customer demand. The expansion of our systems and infrastructure will require us to commit substantial
financial, operational and technical resources in advance of an increase in the volume of business, with no assurance that the
volume of business will increase. Continued growth could also strain our ability to maintain reliable service levels for our customers
and meet their expected delivery schedules, develop and improve our operational, financial and management controls, enhance our
reporting systems and procedures and recruit, train and retain highly skilled personnel.
Managing
our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary
level of efficiency in our organization as it grows, our business, operating results and financial condition would be harmed.
Industry
and Business Risks Related to Thermomedics, Inc.
Cost
and quality issues might arise from our dependence on a third-party, sole source manufacturer.
We
currently buy our products from one third-party, sole source supplier who produces our products in its plant in Taiwan. Although
we have the right to engage other manufacturers, we have not done so. Accordingly, our reliance on this supplier involves certain
risks, including:
●
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The
cost of our products might increase, for reasons such as inflation and increases in the price of the precious metals, if any,
or other internal parts used to make them, which could cause our cost of goods to increase and reduce our gross margin and
profitability if any; and
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Poor
quality could adversely affect the reliability and reputation of our products.
|
Any
of these uncertainties also could adversely affect our business reputation and otherwise impair our profitability and ability
to compete.
We
may not be able to compete effectively.
Our
competition includes Welch Allyn, Braun and Exergen, all of which market a line or lines of thermometers. Each competitor has
national distribution and a longer operating history than we do; and these brands have greater brand name recognition and significantly
greater financial, technical sales, marketing, distribution and research and development resources. We may be unable to compete
successfully against this competition.
Our
research and development may be unsuccessful; our next generation products may not be developed, or if developed may fail to win
commercial acceptance.
Our
business is characterized by extensive research and development, and rapid technological change. Developments by other companies
of new or improved products or technologies, especially of thermometers for use by consumers on pet dogs may make our products
or proposed products obsolete or less competitive and may negatively impact our net sales. We should, subject to having adequate
financial resources (which we currently do not possess), devote continued efforts and financial resources to develop or acquire
scientifically advanced technologies, apply our technologies cost-effectively across our product lines and markets and, attract
and retain skilled electrical engineering and other development personnel. If we fail to develop new products or enhance existing
products, it would have a material adverse effect on our business, financial condition and results of operations.
In
order to develop new products and improve current product offerings, we are focusing our research and development programs largely
on the development of next-generation models intended for the professional health care markets, principally with greater accuracy
than our current models. If we are unable to develop, launch these products as anticipated, and have them accepted commercially,
our ability to expand our market position may be materially adversely impacted. Further, we are investigating opportunities to
further expand our presence in, and diversify into, medical treatment technologies and other medical devices. Expanding our focus
beyond our current business would be expensive and time-consuming. There can be no assurance that we will be able to do so on
terms favorable to us, or that these opportunities will achieve commercial feasibility, obtain regulatory approval or gain market
acceptance. A delay in the development or approval of these technologies or our decision to reduce our investments my adversely
impact the contribution of these technologies to our future growth.
Product
shortages may arise if our contract manufacturer fails to comply with government regulations.
Medical
device manufacturers are required to register with the FDA and are subject to periodic inspection by the FDA for compliance with
its Qualify System Regulation requirements, which require manufacturers of medical devices to adhere to certain regulations, including
testing, quality control and documentation procedures. In addition, the Federal Medical Device Reporting regulations require a
manufacturer to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused
or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious
injury. Compliance with applicable regulatory requirements is subject to continual review and is monitored rigorously through
period inspections by the FDA. Our manufacturer and supplier is International Standards Organization (“ISO”) certified,
but if it were to fail to adhere to quality system regulations or ISO requirements, this could delay production of our products
and lead to fines, difficulties in obtaining regulatory clearances, recalls, enforcement actions, including injunctive relief
or consent decrees, or other consequences, which could, in turn, have a material adverse effect on our financial condition and
results of operations.
Our
medical devices may not meet government regulations.
Our
products and development activities are subject to regulation by the FDA pursuant to the Federal Food, Drug and Cosmetic Act (“FDC
Act”), and, if we should sell our products abroad, by comparable agencies in foreign countries, and by other regulatory
agencies and governing bodies. Under the FDC Act, medical devices must receive FDA clearance or approval before they can be commercially
marketed in the U.S. The FDA is reviewing its clearance process in an effort to make it more rigorous, which may require additional
clinical data, if any, time and effort for product clearance. In addition, most major markets for medical devices outside the
U.S. require clearance, approval or compliance with certain standards before a product can be commercially marketed. The process
of obtaining marketing approval or clearance from the FDA for new products, or with respect to enhancements or modifications to
existing products, could:
●
|
Take
a significant period of time;
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●
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Require
the expenditure of substantial resources;
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|
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●
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Involve
rigorous pre-clinical and clinical testing, as well as increased post-market surveillance;
|
|
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●
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Require
changes to products; and
|
|
|
●
|
Result
in limitations on the indicated uses of products.
|
Countries
around the world have adopted more stringent regulatory requirements that have added or are expected to add to the delays and
uncertainties associated with new product releases, as well as the clinical, if any, and regulatory costs of supporting those
releases. Even after products have received marketing approval or clearance, product approvals and clearances by the FDA can be
withdrawn due to failure to comply with regulatory standards or the occurrence unforeseen problems following initial approval.
There can be no assurance that we will receive the required clearances for new products or modifications to existing products
on a timely basis or that any approval will not be subsequently withdrawn or conditioned upon extensive post-market study requirements.
In
addition, regulations regarding the development, manufacture and sale of medical devices are subject to future change. We cannot
predict what impact, if any, those changes might have on our business. Failure to comply with regulatory requirements could have
a material adverse effect on our business, financial condition and results of operations. Later discovery of previously unknown
problems with a product could result in fines, delays or suspensions of regulatory clearances, seizures or recalls of products,
physician advisories or other field actions, operating restrictions and/or criminal prosecution. We also may initiate field actions
as a result of our manufacturer’s failure to strictly comply with our internal quality policies. The failure to receive
product approval clearance on a timely basis, suspensions of regulatory clearances, seizures or recalls of products, physician
advisories or other field actions, or the withdrawal of product approval by the FDA, could have a material adverse effect on our
business, financial condition and results of operations.
We
may not be able to protect our intellectual property.
The
medical device market in which we primarily participate is largely technology driven. Consumers historicaly move quickly
to new products and new technologies. As a result, intellectual property rights, particularly patents and trade secrets, play
a significant role in product development and differentiation. However, intellectual property litigation is inherently complex
and unpredictable. Furthermore, appellate courts can overturn lower court patent decisions.
We
face intellectual property risks that may negatively affect our brand names, reputation, revenues, and potential profitability.
In
our second-generation products we will be depending upon a variety of methods and techniques that we regard as proprietary trade
secrets. We are also dependent upon a variety of trademarks and designs to promote brand name development and recognition, and
we rely on a combination of trade secrets, patents, trademarks, and unfair competition and other intellectual property laws to
protect our rights to such intellectual property. However, to the extent that our products violate the proprietary right of others
we may be subject to damage awards or judgments prohibiting the use of our intellectual property. See Item 3, “Legal Proceedings,”
for a description of a pending legal proceeding seeking to invalidate one of our design patents. In addition, our rights in our
intellectual property, even if registered, may not be enforceable against any prior users of similar intellectual property. Furthermore,
if we lose or fail to enforce any of our proprietary rights, our brand names, reputation, revenues and potential profitability
may be negatively affected.
In
addition, competing parties frequently file multiple suits to leverage patent portfolios across product lines, technologies and
geographies and to balance risk and exposure between the parties. In some cases, several competitors may be parties in the same
proceeding, or in a series of related proceedings, or litigate multiple features of a single class of devices. These forces frequently
drive settlement not only of individual cases, but also of a series of pending and potentially related and unrelated cases. In
addition, although monetary and injunctive relief is typically sought, remedies and restitution are generally not determined until
the conclusion of the trial court proceeding and can be modified on appeal. Accordingly, the outcomes of individual cases are
difficult to time, predict or quantify and are often dependent upon the outcomes of other cases in other geographies.
Patents
and other proprietary rights are and will continue to be essential to our business, and our ability to compete effectively with
other companies will be dependent upon the proprietary nature of our technologies. We rely upon trade secrets, know-how and continuing
technological innovations to develop, maintain and strengthen our competitive position. We pursue a policy of generally seeking
patent protection in the U.S. for patentable design or subject matter in our devices and attempt to review third-party patents
and patent applications to the extent publicly available in order to develop an effective patent strategy, avoid infringement
of third-party patents, identify licensing opportunities and monitor the patent claims of others. We own three U.S. design patents
and have one U.S. utility patent application pending. We are not a party to any license agreements pursuant to which patent rights
have been obtained or granted in consideration for cash, cross-licensing rights or royalty payments. No assurance can be made
that any pending or future patent application will result in the issuance of patents, or that any future patents issued to, or
licensed by, us will not be challenged or circumvented by our competitors. In addition, we may have to take legal action in the
future to protect our patents, if any, trade secrets or know-how or to assert them against claimed infringement by others. Any
legal action of that type could be costly and time consuming, and no assurances can be given that any lawsuit will be successful.
The
invalidation of key patent or proprietary rights that we may own, or an unsuccessful outcome in lawsuits to protect our intellectual
property, could have a material adverse effect on our business, financial position and results in operations.
Our
trademarks are valuable, and any inability to protect them could reduce the value of our products and brands.
Our
trademarks, trade secrets, and other intellectual property rights are important assets for us. Our trademarks “Thermomedics,”
“Babytemp,” “Temp4sure,” Tempmature,” “Elitemp”, “Caregiver”, and “TouchFree”
are registered with the U.S. Patent and Trademark Office. Protecting these intellectual property rights could be costly and time
consuming, and any unauthorized use of our intellectual property could make it more expensive for us to do business and which
also could harm our operating results.
Product
warranties and product liabilities could be costly.
We
typically warrant the workmanship and materials used in the products we sell. Failure of the products to operate properly or to
meet specifications may increase our costs by requiring replacement or monetary reimbursement to the end user. To the extent we
are unable to make a corresponding warranty claim against the manufacturer of the defective product, we would bear the loss associated
with such warranties. In the ordinary course of our business, we may be subject to product liability claims alleging that products
we sold failed or had adverse effects. We maintain liability insurance at a level which we believe to be adequate. A successful
claim in excess of the policy limits of the liability insurance could materially adversely affect our business. There can be no
assurance, however, that recourse against a manufacturer would be successful, or that our manufacturer maintains adequate insurance
or otherwise would be able to pay such liability.
Industry
and Business Risks Related to Our Legacy Healthcare Businesses
The
sale and license of our legacy healthcare products may not produce royalty streams.
In
2013, we licensed the assets related to our iglucose™ technology to Smart Glucose Meter and in 2015 we licensed our breath
glucose detection system and its underlying patent, which was granted in 2014. Pursuant to these agreements, we are due royalties
based on future product sales, if any. The Company has been informed that the iglucose™ has received FDA 501(k) clearance,
and that commercial sales are expected to begin in 2018. Should these businesses not generate significant revenues, we will not
achieve royalty streams from these sales and licenses.
Implantation
of our implantable microchip may be found to cause risks to a person’s health, which could adversely affect sales of our
systems that incorporate the implantable microchip
.
The
implantation of the VeriChip, which we sold to VeriTeQ, may be found, or be perceived, to cause risks to a person’s health.
Potential or perceived risks include adverse tissue reactions, migration of the microchip and infection from implantation. There
have been articles published asserting, despite numerous studies to the contrary, that the implanted microchip causes malignant
tumor formation in laboratory animals. If more people are implanted with our implantable microchip, it is possible that these
and other risks to health will manifest themselves. Actual or perceived risks to a person’s health associated with the microchip
implantation process could result in negative publicity and could damage our business reputation, leading to loss in sales of
our other systems targeted at the healthcare market which would harm our business and negatively affect our prospects.
In
connection with its acquisition of the VeriChip business, VeriTeQ agreed to indemnify us for any liabilities relating to the implantable
microchip. Further, we are aware that VeriTeQ has sold the assets of the business to an unaffiliated third party who is using
it as an identification device inside of a cosmetic implant, which does not involve direct in vivo use in people. If VeriTeQ or
the buyer of the assets is unable to fulfill indemnity obligations, we could be responsible for payment of such liabilities, which
could have a material adverse impact on our financial condition.
Risks
Related to Our Common Stock
Future
sales of our common stock may depress the market price of our common stock and cause stockholders to experience dilution.
The
market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market,
including shares issuable on the conversion of convertible notes payable. We may seek additional capital through one or more additional
equity or convertible debt transactions in 2018; however, such transactions will be subject to market conditions and there can
be no assurance any such transaction will be completed.
Current
stockholders may experience dilution of their ownership interests because of the future issuance of additional shares of our common
stock issued pursuant to convertible preferred stock and debt instruments.
In the future, we may
issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our present
stockholders and the purchasers of our common stock offered hereby. We are currently authorized to issue an aggregate of 20,000,000,000
shares of capital stock consisting of 19,995,000,000 shares of common stock and 5,000,000 shares of preferred stock with preferences
and rights to be determined by our Board. As of March 16, 2018, there are 3,098,141,085 shares of our common stock, 3,097 of our
Series II preferred stock and 71 of our Series J preferred stock outstanding. There are 1,203 shares of our common stock reserved
for issuance pursuant to stock option agreements. We also have 883 shares of our common stock issuable upon the exercise of outstanding
warrants. We also have convertible notes with approximate principal and accrued interest balances of $5,895,683 as of March
16, 2018. The notes are convertible into common stock, in the future, at prices determined at the time of conversion and the Series
II and Series J are convertible at a fixed conversion price as determined in the respective agreements. The Series II and Series
J and convertible notes would convert into shares of common stock on March 16, 2018, as follows:
|
|
Principal/
|
|
|
Common Share Conversion
|
|
|
|
Liquidation
|
|
|
At Current
|
|
|
At 25%
|
|
|
At 50%
|
|
|
At 75%
|
|
|
|
Value
|
|
|
Market
|
|
|
Discount
|
|
|
Discount
|
|
|
Discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series II (1)
|
|
$
|
3,377,145
|
|
|
|
550,855,463
|
|
|
|
550,855,463
|
|
|
|
550,855,463
|
|
|
|
550,855,463
|
|
Series J (2)
|
|
|
71,000
|
|
|
|
55,469
|
|
|
|
55,469
|
|
|
|
55,469
|
|
|
|
55,469
|
|
Convertible Notes (3)
|
|
|
5,895,683
|
|
|
|
94,080,766,028
|
|
|
|
78,609,112,821
|
|
|
|
117,913,669,232
|
|
|
|
235,827,338,464
|
|
|
|
$
|
9,343,828
|
|
|
|
94,631,676,960
|
|
|
|
79,160,023,753
|
|
|
|
118,464,580,164
|
|
|
|
236,378,249,396
|
|
|
(1)
|
Represents
liquidation value, including accrued dividends, on (i) 2,262 shares of Series II, converted at $0.0168; and (ii) 835 shares
of Series II converted at $0.0022, which are fixed conversion prices.
|
|
(2)
|
Represents
liquidation value on 71 shares of Series J converted at a fixed conversion price of $1.28.
|
|
(3)
|
The
convertible notes are convertible into common stock of the company at prices determined, in the future, at the time of conversion,
at discounts of between 25% and 40% of the market price or at the lesser of a fixed amount or discount to market. This table
includes common shares conversions at the closing bid price of $0.0001 on March 16, 2018, and at discounts of 25%, 50% and
75% from the closing bid price on March 16, 2018.
|
Any
future issuance of our equity or equity-backed securities may dilute then-current stockholders’ ownership percentages and
could also result in a decrease in the fair market value of our equity securities, because our assets would be owned by a larger
pool of outstanding equity. As described above, we may need to raise additional capital through public or private offerings of
our common or preferred stock or other securities that are convertible into or exercisable for our common or preferred stock.
We may also issue such securities in connection with hiring or retaining employees and consultants (including stock options issued
under our equity incentive plans), as payment to providers of goods and services, in connection with future acquisitions or for
other business purposes. Our Board may at any time authorize the issuance of additional common or preferred stock without common
stockholder approval, subject only to the total number of authorized common and preferred shares set forth in our certificate
of incorporation. The terms of equity securities issued by us in future transactions may be more favorable to new investors, and
may include dividend and/or liquidation preferences, superior voting rights and the issuance of warrants or other derivative securities,
which may have a further dilutive effect. Also, the future issuance of any such additional shares of common or preferred stock
or other securities may create downward pressure on the trading price of the common stock. There can be no assurance that any
such future issuances will not be at a price (or exercise prices) below the price at which shares of the common stock are then
traded.
We
do not anticipate declaring any cash dividends on our common stock.
Any
future determination with respect to the payment of dividends will be at the discretion of the Board and will be dependent upon
our financial condition, results of operations, capital requirements, general business conditions, terms of financing arrangements
and other factors that our Board may deem relevant. In addition, our Certificates of Designation for shares of Series I, Series
II and Series J Preferred Stock prohibit the payment of cash dividends on our common stock while any such shares of preferred
stock are outstanding.
Our
shares may be defined as “penny stock,” the rules imposed on the sale of the shares may affect your ability to resell
any shares you may purchase, if at all.
Shares
of our common stock may be defined as a “penny stock” under the Exchange Act, and rules of the SEC. The Exchange Act
and such penny stock rules generally impose additional sales practice and disclosure requirements on broker-dealers who sell our
securities to persons other than certain accredited investors who are, generally, institutions with assets in excess of $5,000,000
or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 jointly with spouse, or
in transactions not recommended by the broker-dealer. For transactions covered by the penny stock rules, a broker-dealer must
make a suitability determination for each purchaser and receive the purchaser’s written agreement prior to the sale. In
addition, the broker-dealer must make certain mandated disclosures in penny stock transactions, including the actual sale or purchase
price and actual bid and offer quotations, the compensation to be received by the broker-dealer and certain associated persons,
and deliver certain disclosures required by the SEC. Consequently, the penny stock rules may affect the ability of broker-dealers
to make a market in or trade our common stock and may also affect your ability to resell any shares you may purchase in this offering
in the public markets.
The
success and timing of development efforts, clinical trials, regulatory approvals, product introductions, collaboration and licensing
arrangements, any termination of development efforts and other material events could cause volatility in our stock price.
Since
our common stock is thinly traded, its trading price is likely to be highly volatile and could be subject to extreme fluctuations
in response to various factors, many of which are beyond our control, including (but not necessarily limited to):
●
|
success
or lack of success in being awarded research and development contracts with U.S. Government agencies, related to our FireflyDX
product, or otherwise;
|
●
|
success
or lack of success being granted patents for its core biological diagnostic and detection technologies;
|
●
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introduction
of competitive products into the market;
|
●
|
receipt
of payments of any royalty payments under the sale and licensing agreements related to our legacy healthcare products;
|
●
|
unfavorable
publicity regarding us or our products;
|
●
|
termination
of development efforts of any product under development or any development or collaboration agreement.
|
In
addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. These market fluctuations may also significantly affect the market price
of our common stock.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
Our
corporate headquarters is located in Delray Beach, Florida, where we occupy approximately 3,000 square feet of office space, under
a non-cancelable operating lease that expires on October 18, 2018. We also have operations in Pleasanton, California, where we
lease approximately 6,250 square feet of laboratory and office space under a non-cancelable operating lease that expires on September
30, 2018. Additionally, we have operations in Concord, California, where we lease 12,000 square feet of office and plant space
on a month-to-month basis.
Item
3. Legal Proceedings
The
Company is a party to certain legal actions, as either plaintiff or defendant, arising in the ordinary course of business, with
the exception of the LG Capital litigation described below, none of which had or 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.
LG
Capital Funding Litigation
On
March 7, 2017, LG Capital Funding, LLC (“LG”), filed a complaint in the U.S. District Court of the
Eastern District of New York (the “Court”), related to a 10% Convertible Redeemable Note issued by us to LG on
July 7, 2016 in the amount of $66,150 (the “LG Note”). The LG Note provides that LG is entitled to convert all or
any amount of the outstanding balance and accrued interest of the LG Note into shares of our Common Stock. The complaint
alleges breach of contract and anticipatory breach of contract, asserting, among other things, that we failed to deliver
shares of stock to LG pursuant to a notice of conversion, and failed to reserve a sufficient number of shares of stock
issuable under the terms of the LG Note. On July 12, 2017, the Court denied LG’s motion for Order to Show Cause and
Request for an Injunction. The Company will continue to answer and defend against this complaint.
Under ASC 450,
the Company has determined that it is reasonably possible but not probable that the outcome of the litigation might be
unfavorable. Based on the Company’s analysis of the outcome of the litigation, the range of potential outcomes are
between $0 and $250,000. As such, the Company has recorded a loss contingency it believes reflects the most likely outcome of
the litigation.
Item
4. Mine Safety Disclosures
Not
applicable.
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
1.
Organization
PositiveID Corporation, including its wholly-owned subsidiaries PositiveID Diagnostics Inc. (“PDI”)
and Thermomedics, Inc. (“Thermomedics”), and its majority-owned subsidiaries, ExcitePCR Corporation (“ExcitePCR”),
E-N-G Mobile Systems, Inc. (“ENG”) (collectively, the “Company” or “PositiveID”), develops
molecular diagnostic systems for bio-threat detection and rapid medical testing; manufactures specialty technology vehicles; and
markets the Caregiver® non-contact clinical thermometer. The Company’s fully automated pathogen detection systems are
designed to detect a range of biological threats. The Company’s M-BAND (Microfluidic Bio-agent Autonomous Networked Detector)
system is an airborne bio-threat detection system developed for the homeland defense industry to detect biological weapons of mass
destruction. The Company is developing the FireflyDX family of products, which are automated pathogen detection systems for rapid
diagnostics, in both portable and handheld forms, for clinical and point-of-need applications. The Company also manufactures specialty
technology vehicles focused primarily on mobile laboratory and communications applications. The Company’s Caregiver®
thermometer is an FDA-cleared infrared thermometer for the professional healthcare market.
Authorized
Common Stock and Reverse Stock Split
On
January 30, 2017, the Company filed the First Amendment to the Company’s Third Amended and Restated Certificate of Incorporation
with the State of Delaware, to increase the Company’s authorized capital stock from 3.9 billion shares to 20 billion shares
(19.995 billion common). The November 30, 2016 filing of the Third Amended and Restated Certificate of Incorporation changed the
par value of the Company’s common stock from $0.001 to $0.0001 (the “Common Stock”).
On
May 19, 2017,
the Company filed the Second Amendment
to the Third Amended and Restated
Certificate of Incorporation, as amended,
with the State of Delaware,
to implement
a 1-for-3,000 reverse stock split of the Company’s outstanding Common Stock, which became effective on May 23, 2017. The
reverse stock split affected the outstanding Common Stock as well as all Common Stock underlying convertible notes, warrants,
convertible preferred stock and stock options outstanding immediately prior to the reverse stock split. The number of authorized
shares was not adjusted. All share and per share amounts in the accompanying historical consolidated financial statements have
been retroactively adjusted to reflect the change in the par value of the Common Stock and the 1-for-3,000 reverse stock split.
On
December 27, 2017, the Company received (i) a written consent in lieu of a meeting of Stockholders (the “Written Consent”)
from holders of shares of voting securities representing approximately 78% of the total issued and outstanding shares of voting
stock of the Company; and (ii) a unanimous written consent of the Board to approve the following: the granting of discretionary
authority to the Board, at any time for a period of 12 months after the date of the Written Consent, to authorize the adoption
of an amendment to the Company’s Third Amended and Restated Certificate of Incorporation, as amended (the “Certificate
of Incorporation”), to effect a reverse stock split of the Company’s common stock at a ratio between 1 for 100 to
1 for 1,000, such ratio to be determined by the Board, or to determine not to proceed with the reverse stock split (the “Reverse
Stock Split”); and the granting of discretionary authority to the Board for a period of 12 months after the date of the
Written Consent, to authorize the adoption of an amendment to the Certificate of Incorporation to decrease the Company’s
authorized capital stock, from 20,000,000,000 shares down to an amount not less than 50,000,000 shares, such decrease to be determined
by the Board, or to determine not to proceed with the decrease in authorized capital stock (the “Decrease in Authorized
Shares”). As of the date of this filing, the Company had not effected the Reverse Stock Split or the Decrease in Authorized
Shares.
Going
Concern
The Company’s consolidated
financial statements have been prepared assuming the Company will continue as a going concern. As of December 31, 2017, we had
a working capital deficit, stockholders’ deficit and accumulated deficit of approximately $10.6 million, $9.7 million and
$165.8 million, respectively, compared to a working capital deficit, stockholders’ deficit and accumulated deficit of approximately
$10.3 million, $9.0 million and $157.2 million, respectively, as of December 31, 2016. The change in the working capital
deficit was primarily due to operating losses for the period and capital raised through convertible debt financings. Net loss
and net cash used in operations was $8.7 million and $3 million, respectively in 2017.
We have incurred operating losses and net cash used in operating activities since the merger that created
PositiveID in 2009. The current 2017 operating losses are the result of research and development expenditures and selling, general
and administrative expenses related to our molecular diagnostics and Caregiver products. We expect our operating losses to continue
through 2018. It’s management’s opinion that these conditions raise substantial doubt about our ability to continue
as a going concern for a period of one year from the issuance date of this report.
Our
ability to continue as a going concern is dependent upon our ability to obtain financing to fund the continued development of
our products and to support working capital requirements. Until we are able to achieve operating profits, we will continue to
seek to access the capital markets. In fiscal 2017 and 2016, we raised approximately $2.7 and $3.8 million, respectively primarily
from the issuance of convertible debt. In addition, during the year ended December 31, 2017, we received approximately $1.4 million
of net proceeds from the sale to a strategic investor of a non-controlling interest in one of our subsidiaries (see Note 5).
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
The
Company intends to continue to access capital to provide funds to meet its working capital requirements for the near-term future.
In addition, and if necessary, the Company could reduce and/or delay certain discretionary research, development and related activities
and costs. However, there can be no assurances that the Company will be able to negotiate additional sources of equity or credit
for its long-term capital needs. The Company’s inability to have continuous access to such financing at reasonable costs
could materially and adversely impact its financial condition, results of operations and cash flows, and result in significant
dilution to the Company’s existing stockholders. The Company’s consolidated financial statements do not include any
adjustments relating to recoverability of assets and classifications of assets and liabilities that might be necessary should
the Company be unable to continue as a going concern.
2.
Summary of Significant Accounting Policies
Principles
of Consolidations
The
consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries of
which all are inactive except for PDI, Thermomedics, ExcitePCR and ENG. All intercompany balances and transactions have been eliminated
in the consolidation.
On
July 17, 2017, ExcitePCR Corporation, a majority-owned subsidiary of the Company, was formed to own and further the development
of the FireflyDX family of products.
ExcitePCR
was incorporated in the State of Delaware
(see Note 5).
Non-Controlling
Interest
On
June 12, 2017, the Company sold 49.2% ownership of ENG, to a strategic investor. Accordingly, the Company is presenting
noncontrolling interests as a component of equity on its consolidated balance sheets under the heading “Non-controlling
interest in consolidated subsidiary” and reports noncontrolling interest net income or loss under the heading “Net
(income) loss allocated to noncontrolling interest in consolidated subsidiary” in the consolidated statements of operations
based on its 50.2% ownership (see Note 5).
On
August 24, 2017, the Company and its wholly-owned subsidiary PositiveID Diagnostics, Inc. (collectively, the “Seller”),
entered into an Asset Purchase Agreement (“APA”) with its majority-owned subsidiary, ExcitePCR Corporation (the “Buyer”).
Pursuant to the APA, at closing, the Company will own approximately 91% of the Buyer post-closing of the sale. As of December
31, 2017, the Buyer has not yet fulfilled the conditions to close the transaction which include the Buyer completing a financing
of at least $3 million. (see Note 5).
On January 30, 2018,
ENG, in order to raise working capital, sold additional ownership of ENG to the strategic investor and as a result of this transaction,
the Company’s equity interest in ENG has decreased to 24%. At December 31, 2017 the Company owned 50.2% of ENG and
controlled ENG’s assets. These assets represented between 50% and 55% of the Company’s overall assets. As a result
of the decreased ownership, as of January 30, 2018, the Company no longer controls ENG’s operations which will result in
the deconsolidation of ENG in 2018. The operations and assets of ENG represent a significant amount of the Company’s assets.
The Company will prospectively deconsolidate the balance sheet, results of operations and cash flows of ENG in its consolidated
financial statements effective January 30, 2018. (see Note 5 and Note 15).
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates during the reported periods include valuation of assets acquired and liabilities assumed in business
combinations, allowance for doubtful accounts receivable, inventories valuation, estimates of depreciable lives and valuation
of property and equipment, valuation of goodwill and intangible assets and related amortization period, valuation of loss and
other contingencies, product warranty liabilities, valuation of derivatives, valuation of beneficial conversion features, estimate
of contingent earn-out liabilities, valuation of stock-based compensation and an estimate of the deferred tax asset valuation
allowance.
Cash
and Cash Equivalents
For
the purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at December 31, 2017 and
2016, respectively. The Company maintained its cash in various financial institutions during the years ended December 31, 2017
and 2016. Balances were insured up to Federal Deposit Insurance Corporation (“FDIC”) limits. At times, cash deposits
exceeded the federally insured limits. There were no cash deposits that exceeded the federally insured limits as of December 31,
2017.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
Accounts
receivable
Accounts
receivable are stated at their estimated net realizable value. The Company reviews its accounts to estimate losses resulting from
the inability of its customers to make required payments. Any required allowance is based on specific analysis of past due accounts
and also considers historical trends of write-offs. Past due status is based on how recently payments have been received from
customers. The Company’s collection experience has been favorable reflecting a limited number of customers. As of December
31, 2017, the recorded allowance was $2,000 and no allowance was recorded at December 31, 2016.
Inventories
Inventory
consists of finished goods of our Caregiver® non-contact thermometers, and in our Mobile Lab Segment consists of finished
goods, standard and manufactured frames and bodies of vehicles, components of mobile units and other materials and is stated at
lower of cost and net realizable value on average basis (see Note 3). The Company early adopted ASU 2015-11 “Simplifying
the Measurement of Inventory” on January 1, 2016, and there was no material impact. Reserves, if necessary, are recorded
to reduce inventory to net realizable value based on assumptions about consumer demand, current inventory levels and product life
cycles for the various inventory items. These assumptions are evaluated periodically and are based on the Company’s business
plan and from feedback from customers and the product development team; however, estimates can vary significantly. As of December
31, 2017 and 2016, inventory reserves were not material.
Reserves
for Warranty
The
Company records a reserve at the time product revenue is recorded based on historical rates. The reserve is reviewed during the
year and is adjusted, if appropriate, to reflect new product offerings or changes in experience. Actual warranty claims are tracked
by product line. The warranty reserves were approximately $37,000 and $17,000 for the years ended December 31, 2017 and 2016,
respectively, and are included in accrued expenses and other liabilities in the accompanying consolidated balance sheet.
Equipment
Equipment
is carried at cost less accumulated depreciation, computed using the straight-line method over the estimated useful lives. Leasehold
improvements are depreciated over the shorter of the lease term or useful life, software is depreciated over 5 years, and equipment
is depreciated over periods ranging from 1 to 8 years. Repairs and maintenance which do not extend the useful life of the asset
are charged to expense as incurred. Gains and losses on sales and retirements are reflected in the accompanying consolidated statements
of operations. Depreciation expense for 2017 and 2016 was $48,000 and $42,000, respectively.
Equipment
consists of the following (in thousands):
|
|
|
|
December
31,
|
|
|
|
Est.
Useful Lives
|
|
2017
|
|
|
2016
|
|
Furniture
and equipment
|
|
3-5
years
|
|
$
|
75
|
|
|
$
|
62
|
|
Machinery
and equipment
|
|
1-8
years
|
|
|
74
|
|
|
|
71
|
|
Autos
|
|
3
-5 years
|
|
|
55
|
|
|
|
35
|
|
Leasehold
improvements
|
|
1-3
years
|
|
|
7
|
|
|
|
7
|
|
Total
equipment
|
|
|
|
|
211
|
|
|
|
175
|
|
Less
accumulated depreciation
|
|
|
|
|
(91
|
)
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, Net
|
|
|
|
$
|
120
|
|
|
$
|
129
|
|
Intangible
Assets and Goodwill
Intangible
assets are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful lives.
Customer contracts and relationships are being amortized over a period of 3 years, patents and other intellectual property are
being amortized over a period of 5 years, and non-compete agreements are being amortized over 2 years (see Note 6).
The
Company continually evaluates whether events or circumstances have occurred that indicate the remaining estimated useful lives
of its definite-lived intangible assets may warrant revision or that the remaining balance of such assets may not be recoverable.
The Company uses an estimate of the related undiscounted cash flows attributable to such asset over the remaining life of the
asset in measuring whether the asset is recoverable.
The
Company records goodwill as the excess of the purchase price over the fair values assigned to the net assets acquired in business
combinations. Goodwill is allocated to reporting units as of the acquisition date for the purpose of goodwill impairment testing.
The Company’s reporting units are those businesses for which discrete financial information is prepared. ASC 350, “Intangibles
— Goodwill and Other” requires that intangible assets with indefinite lives, including goodwill, be evaluated on an
annual basis for impairment or more frequently if an event occurs or circumstances change that could potentially result in impairment.
The goodwill impairment test requires the allocation of goodwill and all other assets and liabilities to reporting units. If the
fair value of the reporting unit is less than the book value (including goodwill), then goodwill is reduced to its implied fair
value and the amount of the write-down is charged to operations. We are required to test our goodwill and intangible assets with
indefinite lives for impairment at least annually.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
As
a result of our analysis, which included the information available in January 2018, resulting in the dilution of the Company’s
interest in ENG, we have concluded based on information currently available, the carrying value of the ENG intangible asset and
goodwill were impaired. An aggregate amount of $342,327, representing the full impairment of ENG goodwill and intangible assets,
was charged to impairment expense in the accompanying consolidated statements of operations for the year ended December 31, 2017
(see Note 6).
Revenue
Recognition
Revenue
is recognized when persuasive evidence of an arrangement exists, collectability of arrangement consideration is reasonably assured,
the arrangement fees are fixed or determinable and upon completion and delivery in accordance with the customer contract or purchase
order.
If
at the outset of an arrangement, the Company determines that collectability is not reasonably assured, revenue is deferred until
the earlier of when collectability becomes probable or the receipt of payment. If there is uncertainty as to the customer’s
acceptance of the Company’s deliverables, revenue is not recognized until the earlier of receipt of customer acceptance
or expiration of the acceptance period. If at the outset of an arrangement, the Company determines that the arrangement fee is
not fixed or determinable, revenue is deferred until the arrangement fee becomes estimable, assuming all other revenue recognition
criteria have been met.
To
date, the Company has generated revenue from three sources: (1) professional services, (2) technology licensing, and (3) product
sales.
Specific
revenue recognition criteria for each source of revenue is as follows:
|
(1)
|
Revenues
for professional services, which are of short term duration, are recognized when services are provided;
|
|
(2)
|
Technology
license revenue is recognized upon the completion of all terms of that license. Payments received in advance of completion
of the license terms are recorded as deferred revenue; and
|
|
(3)
|
Revenue
from sales of the Company’s products is recorded when risk of loss has passed to the buyer and criteria for revenue
recognition discussed above is met. Payments received in advance of delivery and revenue recognition are recorded as deferred
revenue.
|
If
these criteria are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized
ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered
element is delivered. If these criteria are met for each element and there is a relative selling price for all units of accounting
in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative
selling price.
Concentrations
Concentration
of Deferred Revenue
As
of December 31, 2017, the Company had deferred revenue of approximately $0.2 million of which 61% and 39% were from two of the
Company’s customers. As of December 31, 2016, the Company had deferred revenue of approximately $0.4 million of which 54%
and 20% were from two of the Company’s customers.
Concentration
of Revenues
During
the year ended December 31, 2017, the Company had revenue of approximately $5.4 million of which 23%, 9% and 8% were from three
of the Company’s customers. During the year ended December 31, 2016, the Company had revenue of approximately $5.6 million
of which 26%, 13% and 12% were from three of the Company’s customers.
Concentration
of Accounts Receivable
As
of December 31, 2017, the Company had accounts receivable of approximately $0.1 million of which 30% and 24% were from two of
the Company’s customer. As of December 31, 2016, the Company had accounts receivable of approximately $0.3 million of
which 55% and 14% were from two of the Company’s customers.
Concentration of Manufacturer
We currently buy our
primary Thermomedics products from one third-party, sole source supplier who produces our products in its plant in Taiwan. Although
we have the right to engage other manufacturers, we have not done so. Accordingly, our reliance on this supplier involves certain
risks, including:
|
●
|
The cost of our
products might increase, for reasons such as inflation and increases in the price of the precious metals, if any, or other
internal parts used to make them, which could cause our cost of goods to increase and reduce our gross margin and profitability
if any; and
|
|
|
|
|
●
|
Poor quality
could adversely affect the reliability and reputation of our products.
|
Any of these uncertainties
also could adversely affect our business reputation and otherwise impair our profitability and ability to compete.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
Advertising
Costs
Advertising
costs are expensed as incurred. Advertising costs for the years ended December 31, 2017 and 2016 were minimal.
Shipping
and Handling
Costs
incurred by the Company for freight in and freight out are included in costs of revenue. Freight in and freight out costs incurred
for the years ended December 31, 2017 and 2016 were minimal.
Legal
Expenses
All
legal costs are charged to expense as incurred.
Convertible
Notes With Fixed Rate Conversion Options
The
Company has entered into convertible notes, some of which contain fixed rate conversion features, whereby the outstanding principal
and accrued interest may be converted, by the holder, into common shares at a fixed discount to the price of the common stock
at the time of conversion. The Company measures the fair value of the notes at the time of issuance, which is the result of the
share price discount at the time of conversion and records the premium to interest expense on the note issuance date.
Accounting
for Derivatives
The
Company evaluates its convertible debt, options, warrants or other contracts to determine if those contracts or embedded components
of those contracts qualify as derivatives to be separately accounted for. The result of this accounting treatment is that under
certain circumstances the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability.
In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations
as other income or expense. Upon conversion or exercise of a convertible note containing an embedded derivative instrument, the
instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity and the note is reclassified
to equity without gain or loss. Equity instruments that are initially classified as equity that become subject to reclassification
under this accounting standard are reclassified to liability at the fair value of the instrument on the reclassification date.
Debt
Issue Cost
Debt
issuance cost paid to lenders, or third parties are recorded as debt discounts and amortized over the life of the underlying debt
instrument.
Fair
Value of Financial Instruments and Fair Value Measurements
The
Company measures its financial and non-financial assets and liabilities, as well as makes related disclosures, in accordance with
ASC Topic 820,
Fair Value Measurements and Disclosures
(“ASC Topic 820”). For certain of our financial instruments,
including cash, accounts receivable, accounts payable and accrued liabilities, the carrying amounts approximate fair value due
to their short maturities. Amounts recorded for notes payable, net of discount, also approximate fair value because current interest
rates available to the Company for debt with similar terms and maturities are substantially the same.
ASC
Topic 820 provides guidance with respect to valuation techniques to be utilized in the determination of fair value of assets and
liabilities. Approaches include, (i) the market approach (comparable market prices), (ii) the income approach (present value of
future income or cash flow), and (iii) the cost approach (cost to replace the service capacity of an asset or replacement cost).
ASC Topic 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The following is a brief description of those three levels:
|
Level
1:
|
Observable
inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
|
|
Level
2:
|
Inputs
other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets
or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not
active.
|
|
|
|
|
Level
3:
|
Unobservable
inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which
reflect those that a market participant would use.
|
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
Stock-Based
Compensation
Stock-based
compensation expenses are reflected in the Company’s consolidated statements of operations under selling, general and administrative
expenses and research and development expenses.
The
Company estimates the fair value of stock-based compensation awards on the date of grant using the Black-Scholes-Merton (“BSM”)
option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions
and are freely transferable. In addition, option valuation models require the input of highly subjective assumptions including
the expected stock price volatility. The BSM option pricing model considers, among other factors, the expected term of the award
and the expected volatility of the Company’s stock price. Expected terms are calculated using the Simplified Method, volatility
is determined based on the Company’s historical stock price trends and the discount rate is based upon treasury rates with
instruments of similar expected terms. Warrants granted to non-employees are accounted for in accordance with the measurement
and recognition criteria of ASC Topic 505-50, Equity Based Payments to Non-Employees.
Compensation
expense for all stock-based employee and director compensation awards granted is based on the grant date fair value estimated
in accordance with the provisions of ASC Topic 718, Stock Compensation (“ASC Topic 718”). The Company recognizes these
compensation costs on a straight-line basis over the requisite service period of the award, which is generally the vesting term.
Vesting terms vary based on the individual grant terms.
Income
Taxes
The
Company accounts for income taxes under the asset and liability approach for the financial accounting and reporting of income
taxes. Deferred taxes are recorded based upon the tax impact of items affecting financial reporting and tax filings in different
periods. A valuation allowance is provided against net deferred tax assets when the Company determines realization is not currently
judged to be more likely than not.
The
Company follows a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax
position for recognition purposes by determining if the weight of available evidence indicates it is more likely than not that
the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step
is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement.
The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic
adjustments and which may not accurately anticipate actual outcomes. Accordingly, the Company reports a liability for unrecognized
tax benefits resulting from the uncertain tax positions taken or expected to be taken on a tax return and recognizes interest
and penalties, if any, related to uncertain tax positions as interest expense. The Company does not have any uncertain tax positions
at December 31, 2017 and 2016.
Research
and Development Costs
The
principal objective of our research and development program is to develop high-value molecular diagnostic products such as FireflyDX,
the M-BAND system and the Caregiver. We focus our efforts on four main areas: 1) engineering efforts to extend the capabilities
of our systems and to develop new systems; 2) assay development efforts to design, optimize and produce specific tests that leverage
the systems and chemistry we have developed; 3) target discovery research to identify novel micro RNA targets to be used in the
development of future assays; 4) chemistry research to develop innovative and proprietary methods to design and synthesize oligonucleotide
primers, probes and dyes to optimize the speed, performance and ease-of-use of our assays. Research and development cost are expensed
as incurred. Total research and development expense was $0.5 million and $0.4 million for the years ended December 31, 2017 and
2016, respectively.
Segments
The
Company follows the guidance of ASC 280-10 for “Disclosures about Segments of an Enterprise and Related Information.”
The Company operated in three business segments as of December 31, 2017: Molecular Diagnostics, Medical Devices and Mobile Labs
(see Note 14).
Loss
Per Common Share
The
Company presents basic net income (loss) per common share and, if applicable, diluted net income (loss) per share. Basic income
(loss) per common share is based on the weighted average number of common shares outstanding during the year and after preferred
stock dividends. The calculation of diluted income (loss) per common share assumes that any dilutive convertible preferred shares
outstanding at the beginning of each year or the date issued were convertible at those dates, with preferred stock dividend requirements
and outstanding common shares adjusted accordingly. It also assumes that outstanding common shares were increased by shares issuable
upon exercise of those stock options and warrants for which the average period market price exceeds the exercise price, less shares
that could have been purchased by the Company with related proceeds. Additionally, shares issued upon conversion of convertible
debt are included.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
The
following potentially dilutive equity securities outstanding as of December 31, 2017 and 2016 were not included in the computation
of dilutive loss per common share because the effect would have been anti-dilutive:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Common
shares issuable under:
|
|
|
|
|
|
|
|
|
Convertible
notes
|
|
|
4,615,455,033
|
|
|
|
4,429,144
|
|
Convertible
Series II Preferred Stock
|
|
|
543,569,995
|
|
|
|
1,102,798
|
|
Convertible
Series J Preferred Stock
|
|
|
55,469
|
|
|
|
33,810
|
|
Stock
options, restricted stocks and warrants
|
|
|
2,086
|
|
|
|
2,127
|
|
|
|
|
5,159,082,583
|
|
|
|
5,567,897
|
|
The common shares issuable
under the convertible notes, convertible Series II and Series J Preferred Stock as of December 31, 2016 was calculated using the
closing bid price at December 31, 2016 which was $2.10. The prices used to calculate the common shares issuable under the convertible
notes, convertible Series II and Series J Preferred Stock were as follows: (i) closing bid price at December 31, 2017 which was
$0.0021;(ii) fixed conversion prices of $0.0168 and $0.0022 for Series II as determined by the agreements;(iii) fixed conversion
price of $1.28 for Series J (based on Series J stated value of $1,000 per share) as determined by the agreement.
Recent
Accounting Pronouncements
There
are no new accounting pronouncements during the year ended December 31, 2017 other than those described below that affect the
consolidated financial position of the Company or the results of its operations. Accounting Standard Updates which are not effective
until after December 31, 2017, and the potential effects on the Company’s consolidated financial position or results of
its’ operations are discussed below.
ASU
2017-11:
In
July 2017, FASB issued Accounting Standards Update (“ASU”), 2017-11 —Earnings Per Share (Topic 260); Distinguishing
Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments
with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The amendments
in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features)
with down round features. When determining whether certain financial instruments should be classified as liabilities or equity
instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to
an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments.
As
a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as
a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified
financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize
the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available
to common shareholders in basic EPS.
Convertible
instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent
beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS
guidance (in Topic 260).
The
amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented
as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect.
For
public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective
for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments
in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting
effect. The Company is currently evaluating the impact of this accounting standard.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
ASU
2017-08:
In
March 2017, FASB issued Accounting Standards Update (“ASU”), 2017-08—Receivables—Nonrefundable Fees and
Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in this Update more
closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying
securities. In most cases, market participants price securities to the call date that produces the worst yield when the coupon
is above current market rates (that is, the security is trading at a premium) and price securities to maturity when the coupon
is below market rates (that is, the security is trading at a discount) in anticipation that the borrower will act in its economic
best interest. As a result, the amendments more closely align interest income recorded on bonds held at a premium or a discount
with the economics of the underlying instrument.
For
public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after
December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including
adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected
as of the beginning of the fiscal year that includes that interim period. This updated guidance is not expected to have a material
impact on our results of operations, cash flows or financial condition.
ASU
2017-04:
In
January 2017, FASB issued Accounting Standards Update (“ASU”), 2017-04 — Intangibles—Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill Impairment. Under the amendments in this Update, an entity should perform its annual,
or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should
recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however,
the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should
consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill
impairment loss, if applicable. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying
amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment
test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of
goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets.
A
public business entity that is an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill
impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017. This updated guidance is not expected to have a material impact
on our results of operations, cash flows or financial condition.
ASU
2016-20:
In
December 2016, FASB issued Accounting Standards Update (“ASU”), 2016-20 — Technical Corrections and Improvements
to Topic 606, Revenue from Contracts with Customers. The amendments in this Update affect the guidance in Update 2014-09, which
is not yet effective. The effective date and transition requirements for the amendments are the same as the effective date and
transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09
by one year. This updated guidance is not expected to have a material impact on our results of operations, cash flows or financial
condition (see ASU 2016-12 and ASU 2014-09 below).
ASU
2016-12:
In
May 2016, FASB issued Accounting Standards Update (“ASU”), 2016-12— Revenue from Contracts with Customers (Topic
606): Narrow-Scope Improvements and Practical Expedients. The amendments in this Update affect the guidance in Accounting Standards
Update 2014-09, Revenue from Contracts with Customers (Topic 606
)
, which is not yet effective. The effective date and transition
requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and
any other Topic amended by Update 2014-09). Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic
606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year to December 15, 2017. This updated
guidance is not expected to have a material impact on our results of operations, cash flows or financial condition (see ASU 2016-20,
10 and ASU 2014-09 below).
ASU
2016-10:
In
April 2016, FASB issued Accounting Standards Update (“ASU”), 2016-10—Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensing. The amendments in this Update affect the guidance in Accounting Standards
Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition
requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and
any other Topic amended by Update 2014-09). Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic
606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year to annual reporting periods beginning
after December 15, 2017. This updated guidance is not expected to have a material impact on our results of operations, cash flows
or financial condition (see ASU 2016-20, 12 above and ASU 2014-09 below).
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
ASU
2016-02:
In
February 2016, FASB issued Accounting Standards Update (“ASU”), 2016-02— “Leases (Topic 842), Section
A—Leases: Amendments to the FASB Accounting Standards Codification; Section B—Conforming Amendments Related to Leases:
Amendments to the FASB Accounting Standards Codification; Section C—Background Information and Basis for Conclusions”.
Effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for any of
the following:
|
1.
|
A
public business entity
|
|
|
|
|
2.
|
A
not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on
an exchange or an over-the-counter market
|
|
|
|
|
3.
|
An
employee benefit plan that files financial statements with the U.S. Securities and Exchange Commission (SEC).
|
For
all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim
periods within fiscal years beginning after December 15, 2020. Early application of the amendments in this Update is permitted
for all entities. This updated guidance is not expected to have a material impact on our results of operations, cash flows or
financial condition.
ASU
2014-09:
In
June 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”.
The update gives entities a single comprehensive model to use in reporting information about the amount and timing of revenue
resulting from contracts to provide goods or services to customers. The proposed ASU, which would apply to any entity that enters
into contracts to provide goods or services, would supersede the revenue recognition requirements in Topic 605, Revenue Recognition,
and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, the update would supersede
some cost guidance included in Subtopic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts. The
update removes inconsistencies and weaknesses in revenue requirements and provides a more robust framework for addressing revenue
issues and more useful information to users of financial statements through improved disclosure requirements. In addition, the
update improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets
and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer (see
ASU 2016-20, 12 and 10 above).
3.
Inventories
Inventories
consisted of the following (in thousands):
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Finished
goods of non-contact thermometers
|
|
$
|
27
|
|
|
$
|
28
|
|
Materials
inventory
|
|
|
315
|
|
|
|
462
|
|
Mobile
vehicle inventory
|
|
|
91
|
|
|
|
188
|
|
|
|
$
|
433
|
|
|
$
|
678
|
|
4.
Acquisitions/Dispositions
ENG
Mobile Systems Acquisition
On
December 24, 2015, the Company acquired all of the outstanding common stock of E-N-G Mobile Systems, Inc. (“ENG”)
from its sole shareholder (the “Seller”). Pursuant to the Purchase Agreement, as consideration at the time of closing
of the Acquisition, PositiveID paid the Seller $750,000 in cash and issued a convertible secured promissory note to the Seller
in the amount of $150,000. The Company has also entered into a two-year consulting agreement with the Seller. The consulting agreement
was determined not to represent additional purchase price.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
The
Purchase Agreement also provided for earn-out payments that could be earned by ENG to the benefit of the Seller. Each Earn-Out
Payment, was calculated at 5% of the revenue actually recognized and realized from each of the contracts and purchase orders identified,
with an earn-out value indicated for each on the signed backlog schedule (the “Signed Backlog Schedule”) subsequent
to Closing. The Earn-Out Payments were subject to adjustment in conjunction with the finalization of the net asset adjustment
provided for in the Purchase Agreement. The Company recorded a contingent earn-out liability of approximately $123,000, as a current
liability, as reflected in the consolidated balance sheet as of December 31, 2015, and an offsetting recovery asset of approximately
$111,000. During the year ended December 31, 2016, the Company and the seller of ENG agreed to the final measurement of the earn-out
consideration taking into account the finalization of the net asset balance, with total earnout payments of approximately $39,000.
As a result, the Company recorded an additional expense of $27,300 during the year ended December 31, 2016 which is included in
change in acquisition obligations in the accompanying consolidated statement of operations. The contingent earn-out liability
related to ENG had no balance as of December 31, 2016.
The
estimated purchase price of the acquisition totaled $912,000, comprised of $750,000 in cash, a convertible seller note of $150,000
(“ENG Note”), and the fair value of the contingent consideration estimated at approximately $123,000, less an estimated
recovery based on the closing net worth of ENG estimated at $111,000 at December 31, 2015. The fair value of the contingent consideration
was estimated based upon the present value of the expected future payouts of the contingent consideration and was subject to change
upon the finalization of the purchase accounting which occurred during the year ended December 31, 2016, as discussed in the paragraph
above. In connection with the issuance of the ENG Note, the Company computed a premium of $50,000 as the note, at the time of
issuance, was considered stock settled debt under ASC 480, all of which was amortized immediately as a non-cash expense charged
to interest expense in 2016.
The
ENG note matured on December 31, 2016 and had an outstanding balance of $157,664 on the maturity date. The ENG note was amended
on December 31, 2016. Pursuant to the amendment, beginning January 1, 2017 (i) the holder agreed to waive all events of default
so long as the Company met the obligations under this amendment; (ii) the note accrued 8% interest per annum; (iii) the holder
agreed to eliminate all conversion features of the original note which resulted in the reclassification of the $50,000 interest
expense, as discussed in the paragraph above, to other income as gain on extinguishment of debt;(iv) the Company made monthly
payments of $8,000 for the first six months of 2017 and the remaining outstanding principal and interest balance on the ENG note
was paid in full as of June 30, 2017, from the proceeds on sale of non-controlling interest (see Note 5).
The
Company allocated part of the ENG purchase price to goodwill and intangible assets as reflected in the consolidated balance sheet
as of December 31, 2015 and continually assess potential impairment of these assets. As a result of our analysis, which included
the information available in January 2018, resulting in the dilution of the Company’s interest in ENG, we have concluded
based on information currently available, the carrying value of the ENG intangible asset and goodwill were impaired. An aggregate
amount of $342,327, representing the full impairment of ENG goodwill and intangible assets, was charged to impairment expense
in the accompanying consolidated statements of operations for the year ended December 31, 2017 (see Note 6).
The
Company acquired ENG for a number of reasons including the experience of its workforce, the quality and long history of its product
offerings, its prospects for sales and profit growth, and the Company’s ability to leverage its business relationships to
create new growth opportunities.
Thermomedics
Acquisition
On
December 4, 2015, the Company entered into several agreements related to its acquisition of all of the outstanding common stock
of Thermomedics, Inc. (“Thermomedics”). One of those agreements was a Management Services and Control Agreement, dated
December 4, 2015 (the “Control Agreement”), between the Company, Thermomedics, and Sanomedics, Inc. (“Sanomedics”),
whereby PositiveID was appointed the manager of Thermomedics. In a separate agreement, the Company entered into a First Amendment
to the Stock Purchase Agreement (the “Amendment”) with Sanomedics. The original Stock Purchase Agreement (“Purchase
Agreement”) was entered into on October 21, 2015 and defines the agreed upon terms of the Company’s acquisition of
all of the common stock of Thermomedics from Sanomedics. As a result of the Company assuming control of Thermomedics on December
4, 2015, it determined, pursuant to ASC 805-10-25-6, that December 4, 2015 was the acquisition date of Thermomedics for accounting
purposes.
The
estimated purchase price of the acquisition totaled $484,000, comprised of $175,000 in cash, Series J preferred stock consideration
of $125,000, and the fair value of the contingent consideration estimated at approximately $184,000. The fair value of the contingent
consideration was estimated based upon the present value of the expected future payouts of the contingent consideration and is
subject to change upon the finalization of the purchase accounting.
On
December 4, 2015, the Board of Directors authorized and on December 7, 2015, the Company filed with the State of Delaware, a Certificate
of Designations of Preferences, Rights and Limitations of Series J Preferred Stock. The Series J Preferred Stock ranks; (a) senior
with respect to dividends and right of liquidation with the Company’s common stock (b) pari passu with respect to dividends
and right of liquidation with the Company’s Series I Convertible Preferred Stock; and (c) junior with respect to dividends
and right of liquidation to all existing and future indebtedness of the Company. Without the prior written consent of Holders
holding a majority of the outstanding shares of Series J Preferred Stock, the Company may not issue any Preferred Stock that is
senior to the Series J Preferred Stock in right of dividends and liquidation. At any time after the date of the issuance of shares
of Series J Preferred Stock, the Corporation will have the right, at the Corporation’s option, to redeem all or any portion
of the shares of Series J Preferred Stock at a price per share equal to 100% of the $1,000 per share stated value of the shares
being redeemed. Series J Preferred Stock is not entitled to dividends, interest and voting rights. The Series J Preferred Stock
is convertible into the Company’s common stock, at stated value, at a conversion price equal to 100% of the arithmetic average
of the VWAP of the common stock for the fifteen trading days prior to the six-month anniversary of the Issuance Date.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
On August 25, 2016, PositiveID
completed the acquisition and entered into an agreement with the Sanomedics and Thermomedics (the “August Agreement”),
which amends certain terms of the Purchase Agreement and terminates the Control Agreement. The amendments to the Purchase Agreement
include: (a) that any legal expense or losses incurred by PositiveID after June 30, 2016 related to the Exergen litigation shall
have the effect of reducing any future earnouts that may be owed to the Sanomedics, dollar for dollar; (b) PositiveID and the
Sanomedics also agreed to settle the final closing net working capital adjustment through a reduction of the Series J Preferred
Stock shares to be released from escrow. As a result, the 125 shares of Preferred Series J stock originally issued shall be released
from escrow as follows: 71 shares to Sanomedics and 54 shares returned to the Company’s treasury. As of December 31, 2017,
the 71 shares Series J preferred stock is convertible into 55,469 of the Company’s common shares at fixed conversion price
of $1.28 (based on the stated value of $1,000 per share) as determined by the agreement (see Note 2).
In connection with the acquisition, the Company issued a Convertible Promissory Note to the former CEO of
the Sanomedics and President of Thermomedics (the “Holder”), dated August 25, 2016 in the aggregate principal amount
of $75,000 (the “Note”). The Note bears an interest rate of 5% and is due and payable before or on August 25, 2017.
The Note may be converted by the Holder at any time after February 28, 2017 into shares of Company’s common stock at a price
equal to a 10% discount to the average of the three lowest daily VWAPs (volume weighted average price) of the Company’s common
stock as reported for the 10 trading days prior to the day the Holder requests conversion. Any conversion will be limited by: (i)
Holder may not make more than one conversion every ten trading days, and (ii) the amount of conversion shares at any conversion
may not be more than the total number of shares of Common Stock traded over the ten trading days preceding the conversion notice
multiplied by 5%. The Note may be prepaid in accordance with the terms set forth in the Note. The Note also contains certain representations,
warranties, and events of default including if the Company fails to pay when due any amount owed on the Note and increases in the
amount of the principal and interest rates under the Note in the event of such defaults. In the event of default, at the option
of the Holder and in the Holder’s sole discretion, the Holder may consider the Note immediately due and payable. The Company
recorded this expense of $75,000 in the change in acquisition obligations in the accompanying consolidated statement of operations.
In connection with the issuance of the Note, the Company computed a premium of $8,333 as the note, at the time of issuance, was
considered a stock settled debt under ASC 480, all of which was amortized immediately as a non-cash expense charged to interest
expense.
The
Note was amended on June 29, 2017. Pursuant to the amendment (i) the holder agreed to waive all events of default so long as the
Company met the obligations under this amendment; (ii) the holder agreed to eliminate all conversion features of the original
note which resulted in the reclassification of the $8,333 interest expense, as discussed in the paragraph above, to other income
as gain on extinguishment of debt;(iii) the Company agreed to a payment amortization schedule in which the Company pays monthly
payments of $5,000 until the note is paid in full. As of December 31, 2017, the outstanding principal and interest on the remaining
note was $44,168 (see Note 9).
In
consideration for the Note, the Company entered into a Consent and Release by and between the Company, Thermomedics, the Holder
and Vitacura LLC, a Florida limited liability corporation (“Vitacura”), which is wholly owned by the Holder (the “Release”),
pursuant to which the Holder and Vitacura agreed to release the Company and Thermomedics from any and all causes of action.
In
connection with the acquisition, additional earn-out payments of up to $750,000 for each of the fiscal years ending December 31,
2017 and 2016 may be earned by the Thermomedics if certain revenue thresholds are met as described in the Purchase
Agreement. Such earn-out payments, if any, will consist of 25% in cash, up to $187,000 and 75% and in shares of preferred stock
of the Company, up to 563 shares of Preferred Stock, for each of the fiscal years ending December 31, 2017 and 2016. The Company recorded a contingent earn-out liability of $184,000, as a non-current liability in 2015. The Company
adjusted the contingent earn-out liability to its fair value during the year ended December 31, 2016. As of December 31, 2016,
the estimated value of the earn-out liability was nil.
As
a result of the August Agreement and the revaluation of the earn-out, the Company reduced other assets by $12,000, reduced goodwill
by $17,000, reduced Preferred Series J by $54,000, reduced the contingent earn-out liability by $184,000 and recognized a net
gain of $209,000 included in change in acquisition obligations, in the accompanying consolidated statement of operations for the
year ended December 31, 2016.
The
Company acquired Thermomedics for a number of reasons including the quality of its Caregiver® product, its prospects for sales
and profit growth, its management team strengths in sales and marketing FDA cleared medical devices, and their regulatory experience.
Under
the acquisition method of accounting, the estimated purchase price of the acquisitions was allocated to net tangible and identifiable
intangible assets and liabilities of Thermomedics and ENG assumed based on their estimated fair values. The estimated fair values
of certain assets and liabilities have been estimated by management and are subject to change upon the finalization of the fair
value assessments.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
|
|
Thermomedics
|
|
|
ENG
|
|
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
Assets
acquired:
|
|
|
|
|
|
|
|
|
Net
tangible assets
|
|
$
|
35
|
|
|
$
|
2,584
|
|
Customer
contracts and relationships
|
|
|
240
|
|
|
|
238
|
|
Other
assets
|
|
|
12
|
|
|
|
7
|
|
Patents
and other intellectual property
|
|
|
178
|
|
|
|
-
|
|
Goodwill
|
|
|
108
|
|
|
|
200
|
|
|
|
|
573
|
|
|
|
3,029
|
|
Liabilities
acquired:
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
(89
|
)
|
|
|
(2,116
|
)
|
Long
term debt
|
|
|
-
|
|
|
|
(1
|
)
|
Total
estimated purchase price
|
|
$
|
484
|
|
|
$
|
912
|
|
Contingent
earn-out liability for Thermomedics and ENG as of December 31, 2017 and 2016 is as follows (in thousands):
Contingent
Earn-Out Liability (In thousands):
|
|
|
|
|
Balance of contingent earn-out liability
as of December 31, 2015
|
|
$
|
307
|
|
Payment
during 2016
|
|
|
(39
|
)
|
Change
in FV of liability during 2016 included in change in acquisitions, net
|
|
|
(268
|
)
|
Balance of
contingent earn-out liability as of December 31, 2016
|
|
$
|
—
|
|
Change
in FV of liability during 2017
|
|
|
—
|
|
Balance
of contingent earn-out liability as of December 31, 2017
|
|
$
|
—
|
|
Sale
of VeriChip Business to Former Related Party
Throughout
the course of 2012 to 2014, the Company and VeriTeQ, a business run by a former related party (CEO of the Company through 2011),
entered into a number of agreements for the intellectual property related to the Company’s embedded biosensor portfolio,
which ultimately resulted in a GlucoChip and a Settlement Agreement, entered into on October 20, 2014 (the “VeriTeQ Agreements”),
under which the final element of the Company’s implantable microchip business was sold to VeriTeQ.
Pursuant
to the VeriTeQ agreements, the Company holds a series of convertible notes that was received as payment for shared services payments
that the Company made on behalf of VeriTeQ during 2011 and 2012, and advances. As of December 31, 2017, the Company had outstanding
convertible notes receivable from VeriTeQ of $449,980, inclusive of accrued interest, and is also owed $541,175 of default principal
and interest for a total amount receivable of $991,155. All amounts owed from VeriTeQ are fully reserved in all periods presented.
The Company also holds
a five-year warrant dated November 13, 2013, with original terms entitling the Company to purchase 300,000 shares of VeriTeQ common
stock at a price of $2.84 which expires November 13, 2018. Pursuant to the terms of the warrant, in particular the full
quantity and pricing reset provisions, the warrant had an original dollar value of $852,000 and can be exercised using a cashless
exercise feature. As of December 31, 2015, the Company exercised a portion of the warrant and recognized a gain of $355,600. As
of December 31, 2017, the Company holds approximately 256,960 warrants with a dollar value of $729,000. The value of the warrant
has also been fully reserved in all periods presented.
As
VeriTeQ is an idle company and not capitalized, the Company plans to continue to fully reserve all note receivable and warrant
balances. If and when proceeds are realized in the future, gains will be recognized.
License
of iglucose
On
February 15, 2013, the Company licensed its FDA cleared
iglucose
™ system to SGMC for up to $2 million based on potential
future revenues of glucose test strips sold by SGMC. These revenues will range between $0.0025 and $0.005 per strip. A person
with diabetes who tests three times per day will use over 1,000 strips per year.
iglucose
™
uses machine-to-machine technology to automatically communicate a diabetic’s glucose readings to the
iglucose
™
online database.
iglucose
™ is intended to provide next generation, real-time data to improve diabetes management
and help ensure patient compliance, data accuracy and insurance reimbursement.
In
consideration for the rights and licenses, SGMC shall pay to the Company the amount set forth below for each glucose test strip
sold by SGMC and any sublicenses of SGMC for which results are posted by SGMC via its communications servers (the “Consideration”):
|
(i)
|
$0.0025
per strip sold until SGMC has paid aggregate Consideration of $1,000,000; and
|
|
|
|
|
(ii)
|
$0.005
per strip sold thereafter until SGMC has paid aggregate Consideration of $2,000,000; provided, however, that the aggregate
Consideration payable by SGMC pursuant to the SGMC Agreement shall in no event exceed $2,000,000.
|
The
Company has been informed that the
iglucose
™ has received FDA 501(k) clearance, and that commercial sales are expected
to begin in 2018 however, no such guarantees can be made. As of December 31, 2017, no royalties have been realized from this agreement.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
5.
Non-Controlling Interest in Consolidated Subsidiary
ExcitePCR
On
August 24, 2017, the Company and its wholly-owned subsidiary PositiveID Diagnostics, Inc. (collectively, the “Seller”),
entered into an Asset Purchase Agreement (“APA”) with its majority-owned subsidiary, ExcitePCR Corporation (the “Buyer”).
Pursuant to the APA, at closing, the Seller will sell and deliver to the Buyer all right, title and interest in all assets used
or useful in connection with the operation of the FireflyDX technology, which consists of the FireflyDX intellectual property
and that of its predecessor, the Dragonfly Dx technology and products, along with patents, the applicable know how used in the
development of the FireflyDX and Dragonfly Dx technology, and breadboard prototypes of both products (the “FireflyDX Technology”).
The consideration to be paid by the Buyer to the Seller pursuant to the APA, will be 10,500,000 shares of common stock of the
Buyer, and the Company will own approximately 91% of the Buyer post-closing of the sale (prior to any financing). As a condition
to the Seller’s obligation to close the transaction, the Buyer shall have completed a financing transaction with net proceeds
to the Buyer of at least $3 million. Additional conditions and deliverables at closing include a patent assignment agreement,
accounting services agreement, license agreement, and certain required consents from third parties.
The
Company believes that the FireflyDX Technology has significant potential value to stockholders. The parties have entered into
the APA so the Buyer can secure financing and then independently pursue the development, improvement and commercialization of
the Firefly Technology. The current stockholders of the Buyer include two third-party individuals, who are working with the Buyer
to develop and execute the business plan of the Buyer. Lyle L. Probst (the Company’s President) is the Chief Executive Officer
of the Buyer and William J. Caragol (the Company’s Chairman and CEO), is the Chairman of the Buyer. As of December 31, 2017,
the Buyer and the Company had not yet closed the transaction.
ENG
Mobile Systems
On June 12, 2017, the
Company entered into a Stock Purchase Agreement (“SPA”) with ENG, a California corporation and Holdings ENG, LLC,
a Florida limited liability company, and an affiliate of East West Resources Corporation (the “Purchaser”), pursuant
to which (i) the Company sold 49.8%, or two hundred ninety nine (299) shares of Series A Convertible Preferred Stock (the
“Purchased Shares”), of ENG, (ii) the Company granted Purchaser an option to purchase up to an additional 10%, or
sixty (60) shares of Series A Convertible Preferred Stock, of ENG from the Company’s holdings (the “Option Shares”)
and (iii) ENG, pursuant to a stock option agreement (the “Stock Option Agreement”), granted Purchaser an option to
purchase 1%, or three (3) shares of Series A Convertible Preferred Stock, of ENG directly from ENG (collectively, the “Transaction”).
The Company received one million four hundred ninety-five thousand dollars ($1,495,000) or $5,000 per share of Series A Convertible
Preferred Stock, in exchange for the Purchased Shares. The exercise price payable to the Company or ENG for each of the Company’s
Option Shares is five thousand dollars ($5,000).
Immediately
prior to the closing of the Transaction, ENG effected a recapitalization so that there are two classes of its stock as follows:
(i) 2,000 authorized shares of common stock, $0.001 par value, with 241 shares, issued and outstanding and held by the Company;
and (ii) 1,000 authorized shares of Series A Convertible Preferred Stock, $0.001 par value (the “Series A Convertible Stock”),
with 359 shares of Series A Convertible Stock issued and outstanding and held by the Company prior to the closing of the Transaction.
After the closing of the transaction, the Company owned 60 shares of Series A Convertible Stock. Immediately following the closing
of the Transaction, the Company owned 241 common shares and 60 shares of Series A Convertible Preferred Stock of ENG, or 50.2%
of the voting interest in ENG; immediately following the closing of the Transaction, the Purchaser owned 299 shares of Series
A Convertible Preferred Stock of ENG, or 49.8% of the voting interest in ENG.
A
summary of the Series A Convertible Stock of ENG is set forth below:
Voting
and Protective Provisions.
The Series A Convertible Stock shall vote together with the common stock of ENG, except as required
by law. The Series A Convertible Stock contain protective provisions such that the vote of a majority of the outstanding shares
of Series A Stock is required to engage in certain acts, including (i) file a petition in bankruptcy; (ii) create, authorize,
authorize the creation of, issue or sell any equity security, any security convertible into or exercisable for any equity security
or option; (iii) permit any consolidation, reorganization or merger of ENG with or into any other person; (iv) acquire all or
substantially all of the properties, assets or capital stock of any other corporation or entity; (v) sell, lease or otherwise
dispose of assets or properties of ENG in an aggregate amount in excess of $100,000 in any calendar year, other than in the ordinary
course of business; (vi) grant any lien on or security interest in any of ENG’s assets other than in the ordinary course
of business; (vii) incur any indebtedness for borrowed funds, excluding any draws on any line of credit in the ordinary course
of business; (viii) create or authorize the creation of any debt security; (ix) approve or execute any contract, agreement or
lease giving rise to a financial commitment or obligation of ENG other than in the ordinary course of business; (x) purchase or
redeem or pay any dividend on any capital stock, make any distribution or authorize a stock split or split-up; (xi) increase or
decrease the size of the Board of Directors of ENG; (xii) create, or authorize the creation of, a subsidiary; (xiii) make any
loan or advance to any person, except advances in the ordinary course of business; (xiv) guarantee any indebtedness except for
trade accounts of ENG arising in the ordinary course of business; (xv) make any investment inconsistent with any investment policy
approved by the Board of Directors of ENG; (xvi) enter into or be a party to any transaction with (A) any director, officer or
employee of ENG or any “associate” (as defined in Rule 12b-2 promulgated under the Exchange Act) of any such person
or (B) any “affiliate” (as defined in Rule 12b-2 promulgated under the Exchange Act); (xvii) change the principal
business of ENG, enter new lines of business, or exit the current line of business; (xviii) sell, assign, license, pledge or encumber
material technology or intellectual property, other than licenses granted in the ordinary course of business; (xix) amend the
Articles of Incorporation or the Bylaws of ENG (xx) purchase, option or otherwise acquire any real property or any interest therein;
(xxi) dissolve, wind-up or cease operations of ENG; or (xxii) enter into any corporate strategic relationship, joint venture or
partnership.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
Dividends.
Dividends may not be declared on any class of stock unless paid pro rata on all classes of stock.
Liquidation
.
Upon on any liquidation, dissolution or winding up of ENG, after payment or provision for payment of debts and other liabilities
of ENG, before any distribution or payment is made to the holders common stock or any junior securities, the holders of Series
A Convertible Stock shall first be entitled to be paid out of the assets of the Company available for distribution to its stockholders
an amount equal to $5,000 per share (subject to adjustment in the event of any stock dividend, stock split, combination or other
similar recapitalization with respect to the Series A Convertible Stock), plus any dividends declared but unpaid on such shares.
The occurrence of a merger or consolidation or sale of substantially all of the assets of ENG shall be deemed to be a liquidation
of ENG.
In
addition, in connection with the Transaction, the Company entered into an Executive Services Agreement, dated June 12, 2017, with
Purchaser and Mr. Lyle Probst, the Company’s President (the “Executive Services Agreement”), pursuant to which
the Company has agreed to provide ENG the services of Mr. Probst to continue to act as President of ENG (the “Services”).
As compensation for the Services, ENG will pay the Company nine thousand five hundred twenty-five dollars ($9,525) per month,
for a twelve-month period.
The
Company retained control over ENG and accounted for sale of the non-controlling interest as an equity transaction in accordance
with ASC 810-10-42-23. No gain or loss was recognized in the accompanying consolidated statement of operations. The difference
between the fair value of consideration, transaction costs and carrying amount of the non-controlling interest resulted in “net
gain” in the amount of $1,242,083 which was recorded in the in the equity section of the accompanying balance sheet in additional
paid in capital. The carrying amount of the non-controlling interest was recorded separate from the Company’s total equity
under “non-controlling interest in consolidated subsidiaries” and was adjusted to reflect the change in ownership
interest in the subsidiary as of June 30, 2017. The net gain and adjustment to the carrying amount of the non-controlling interest
as of December 31, 2017 are detailed below:
Sale
of non-controlling interest reconciliation:
|
|
|
|
Fair
value of consideration
|
|
$
|
1,495,000
|
|
Transaction
costs
|
|
|
(107,255
|
)
|
Cash
received
|
|
|
1,387,745
|
|
Equity
allocated to non-controlling interest
|
|
|
(67,662
|
)
|
PSID
common stock issued as fee (transaction cost)
|
|
|
(78,000
|
)
|
Net
gain on sale of non-controlling interest
|
|
$
|
1,242,083
|
|
Non-controlling interest balance reconciliation:
|
|
|
|
Beginning balance, January 1, 2017
|
|
$
|
—
|
|
Equity allocated to non-controlling interest, June 12, 2017
|
|
|
67,662
|
|
Loss allocated to non-controlling interest during 2017
|
|
|
(166,216
|
)
|
Ending balance, December 31, 2017
|
|
$
|
(98,554
|
)
|
On January 30, 2018, ENG
entered into a Stock Purchase Agreement (“SPA II”) with the Purchaser, pursuant to which (i) ENG sold six hundred
forty one (641) shares (the “Shares”) of Series A Convertible Preferred Stock of ENG for a purchase price of approximately
$312 per share, for an aggregate purchase price of $200,000; and (ii) the Company declined to exercise its right to purchase a
pro rata portion of the Shares and has approved the issuance and sale of the Shares by ENG to the Purchaser, and waived all rights
it may have with respect to ENG’s purchase of the Shares. In connection with the transaction, the Company also committed
to issue a promissory note in the amount of $54,000 to ENG for settlement of past and current intercompany transactions and liabilities.
As a result of this transaction the Company’s equity interest in ENG has decreased to 24% and prospectively the Company
will deconsolidate the balance sheet, results of operations and cash flows of ENG in its consolidated financial statements and
will account for ENG under the equity method of accounting. At December 31, 2017 the Company owned 50.2% of ENG and controlled
ENG’s assets. These assets represented between 50% and 55% of the Company’s overall assets. As the result of the Company
owning 24% of ENG as of January 30, 2018 and no longer controlling ENG’s assets, the Company will not consolidate
the results of ENG, comprising a significant amount of the Company’s assets, as of January 30, 2018.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
6.
Intangible Assets and Goodwill
Intangible
assets consist of the following as of December 31, 2017 and 2016 (in thousands):
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Impairment
|
|
|
Net
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
contracts and relationships
|
|
$
|
708
|
|
|
$
|
(425
|
)
|
|
$
|
(143
|
)
|
|
$
|
140
|
|
|
$
|
708
|
|
|
$
|
(330
|
)
|
|
$
|
378
|
|
Patents
and other intellectual property
|
|
|
1,401
|
|
|
|
(1,347
|
)
|
|
|
—
|
|
|
|
54
|
|
|
|
1,401
|
|
|
|
(1,287
|
)
|
|
|
114
|
|
Non-compete
agreements
|
|
|
169
|
|
|
|
(169
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
169
|
|
|
|
(169
|
)
|
|
|
—
|
|
|
|
$
|
2,278
|
|
|
$
|
(1,941
|
)
|
|
$
|
(143
|
)
|
|
$
|
194
|
|
|
$
|
2,278
|
|
|
$
|
(1,786
|
)
|
|
$
|
492
|
|
Amortization
of intangible assets amounted to approximately $155,000 and $257,000 for the year ended December 31, 2017 and 2016 respectively.
Estimated future amortization expense is as follows (in thousands):
2018
|
|
$
|
102
|
|
2019
|
|
|
48
|
|
2020
|
|
|
44
|
|
|
|
$
|
194
|
|
In assessing potential impairment of the intangible assets recorded in connection with PDI, ENG and Thermomedics,
as of December 31, 2017, we performed discounted cash flow analyses and comparable assets analyses on a per segment basis. As a
result of our analysis, which included the information available in January 2018, resulting in the dilution of the Company’s
interest in ENG, we have concluded based on information currently available, the carrying value of the ENG intangible asset was
impaired and the Company recognized an impairment charge of $142,800 during the year ended December 31, 2017. We also concluded,
from our analysis, that the intangible assets recorded in connection with the Thermomedics acquisition were not impaired at December
31, 2017.
Goodwill
consists of the following as of December 31, 2017 and 2016 (in thousands):
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
PDI
|
|
$
|
510
|
|
|
$
|
510
|
|
Thermomedics
|
|
|
91
|
|
|
|
91
|
|
ENG
|
|
|
—
|
|
|
|
199
|
|
|
|
$
|
601
|
|
|
$
|
800
|
|
In assessing potential impairment of the goodwill recorded in connection with the PDI, ENG and Thermomedics,
the Company performed its annual impairment test of goodwill as of December 31, 2017. As a result of our annual impairment test,
we have concluded based on information currently available, which included the information available in January 2018, resulting
in the dilution of the Company’s interest in ENG, the carrying value of the ENG goodwill was impaired and the Company recognized
an impairment charge of $199,527 during the year ended December 31, 2017. We also concluded, from our annual impairment test, that
the goodwill recorded from the acquisition of Thermomedics and PDI were not impaired at December 31, 2017.
An
aggregate amount of $342,327, representing the full impairment of ENG goodwill and intangible assets, was charged to impairment
expense in the accompanying consolidated statements of operations for the year ended December 31, 2017.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
7.
Deferred revenue
During
the course of its typical projects, the Company’s subsidiary, ENG requires front end funding to acquire the required materials
and begin production. Frequently, customers are billed in advance of production to secure the necessary resources to facilitate
timely completion of the project. As of December 31, 2017 and 2016, the Company had $0.2 million and $0.4 million of deferred
revenue, respectively, primarily relating to its ENG subsidiary operations.
8.
Accrued Expenses
Accrued
expenses and other current liabilities consisted of the following as of December 31, 2017 and 2016 (in thousands):
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Accrued
compensation
|
|
$
|
575
|
|
|
$
|
467
|
|
Series
II Preferred Stock dividends
|
|
|
235
|
|
|
|
54
|
|
Other
|
|
|
373
|
|
|
|
286
|
|
|
|
$
|
1,183
|
|
|
$
|
807
|
|
9.
Equity and Debt Financing Agreements and Fair Value Measurements
Convertible
Note Financings
Short-term
convertible debt for the years ended December 31, 2017 and 2016 are as follows (in thousands):
|
|
2017
|
|
|
2016
|
|
|
|
Notes
|
|
|
Accrued
Interest
|
|
|
Total
|
|
|
Notes
|
|
|
Accrued
Interest
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
notes with accrued interest accounted for as stock settled debt
|
|
$
|
1,591
|
|
|
$
|
85
|
|
|
$
|
1,676
|
|
|
$
|
602
|
|
|
$
|
36
|
|
|
$
|
638
|
|
Conversion
premiums
|
|
|
936
|
|
|
|
—
|
|
|
|
936
|
|
|
|
287
|
|
|
|
—
|
|
|
|
287
|
|
|
|
|
2,527
|
|
|
|
85
|
|
|
|
2,612
|
|
|
|
889
|
|
|
|
36
|
|
|
|
925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
notes with embedded derivatives
|
|
|
3,349
|
|
|
|
861
|
|
|
|
4,210
|
|
|
|
4,611
|
|
|
|
819
|
|
|
|
5,430
|
|
Derivative
discounts
|
|
|
(337
|
)
|
|
|
—
|
|
|
|
(337
|
)
|
|
|
(1,367
|
)
|
|
|
—
|
|
|
|
(1,367
|
)
|
|
|
|
3,012
|
|
|
|
861
|
|
|
|
3,873
|
|
|
|
3,244
|
|
|
|
819
|
|
|
|
4,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original
issue discounts and loan fee discounts
|
|
|
(108
|
)
|
|
|
—
|
|
|
|
(108
|
)
|
|
|
(180
|
)
|
|
|
—
|
|
|
|
(180
|
)
|
|
|
$
|
5,431
|
|
|
$
|
946
|
|
|
$
|
6,377
|
|
|
$
|
3,953
|
|
|
$
|
855
|
|
|
$
|
4,808
|
|
Dominion
Convertible Debt Financings
On
November 25, 2014, the Company closed a financing transaction by entering into a Securities Purchase Agreement dated November
25, 2014 (the “Note I SPA”) with Dominion Capital LLC (the “Purchaser”) for an aggregate subscription
amount of $4,000,000 (the “Purchase Price”). Pursuant to the Note I SPA, the Company issued a series of 4% Original
Issue Discount Senior Secured Convertible Promissory Notes (collectively, the “Note I”) to the Purchaser. The Purchase
Price will be paid in eight equal monthly payments of $500,000. Each individual Note was issued upon payment and will be amortized
beginning six months after issuance, with amortization payments being 1/24
th
of the principal and accrued interest,
made in cash or common stock at the option of the Company, subject to certain conditions contained in the Note I SPA. The Company
also reimbursed the Purchaser $25,000 for expenses from the proceeds of the first tranche and the Purchaser’s counsel $25,000
from the first tranche.
On
August 14, 2015, the Company closed a financing transaction by entering into a Securities Purchase Agreement dated August 14,
2015 (the “Note II SPA”) with Dominion Capital LLC (the “Purchaser”) for an aggregate subscription amount
of $2,400,000 (the “Purchase Price”). Pursuant to the Note II SPA, the Company issued a series of 4% Original Issue
Discount Senior Secured Convertible Promissory Note (collectively, the “Note II”) to the Purchaser. The Purchase Price
was paid in six equal monthly payments of $400,000. Each individual Note was issued upon payment and is amortized beginning six
months after issuance, with amortization payments being 1/24
th
of the principal and accrued interest, made in cash
or common stock at the option of the Company, subject to certain conditions contained in the Note II SPA. The Company also reimbursed
the Purchaser $20,000 for expenses from the proceeds of the first tranche and the Purchaser’s counsel $10,000 from the first
tranche.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
The
aggregate principal amount of both Notes I and II are issued with a 4% original issue discount whereby the aggregate principal
amount of Notes I and II is $6,400,000 but the actual purchase price of Notes I and II is $6,144,000. Each of Notes I and II accrue
interest at a rate equal to 12% per annum and with maturity dates, depending on the date funded, between June 26, 2016 and June
30, 2017. Notes I and II are convertible any time after the issuance date of the notes. The Purchasers have the right to convert
Note I into shares of the Company’s common stock at a conversion price equal to 95% of the daily VWAP on the trading day
immediately prior to the closing of each tranche. The Purchasers have the right to convert Note II into shares of the Company’s
common stock at a conversion price equal to $4,200. Additionally, under certain conditions defined in Notes I and II, the notes
would be convertible into common stock at a price equal to 62.5% of the lowest VWAP during the 15 Trading Days immediately prior
to the applicable amortization date. In the event that there is an Event of Default or certain conditions are not met, the conversion
price will be adjusted to equal to 55% of the lowest VWAP during the thirty (30) Trading Days immediately prior to the applicable
Conversion Date. Notes I and II can be prepaid at any time upon five days’ notice to the Holder by paying an amount in cash
equal to the outstanding principal and interest and a 120% premium.
During 2015, the Company had received all eight tranches under the Note I SPA ($500,000 principal in 2014
and $3,650,000 principal in 2015 which includes an additional $150,000 added to one of the agreed $500,000 monthly funding as requested
by the Company), with maturity dates, depending on the date funded, between June 26, 2016 and December 29, 2016, pursuant to a
convertible note. Under the agreement, the Company received $3,540,600, which was net of the $448,400 Purchaser’s expenses
and legal fees and $166,000 which represents the 4% original issue discount. As of June 30, 2016, the Company has received, all
six tranches under the Note II SPA ($2,281,250 in principal in 2015 and $208,333 in 2016) with maturity dates of February 15, 2017
and June 30, 2017, pursuant to a convertible note. Under the agreement, the Company received $2,143,000, which was net of Purchaser’s
expenses, legal fees of $247,000 and a 4% original issue discount of $99,583. The notes might be accelerated if an event of default
occurs under the terms of the note, including the Company’s failure to pay principal and interest when due, certain bankruptcy
events or if the Company is delinquent in its SEC filings. In connection with the issuance of Notes I and II, the Company recorded
a debt discount of $387,000 in 2014, $5,116,600 in 2015 and $180,000 in 2016, totaling to $5,683,600 of debt discount recorded,
related to the embedded conversion option derivative liability. The amortization expense related to that discount recorded were
approximately $3,287,000 as of December 31, 2016 and $161,000 during the six months ended June 30, 2017. As of June 30, 2017, the
total debt discount recorded has been fully amortized. During the year ended December 31, 2016, $4,064,000 of the outstanding principal
and interest on Notes I and II was converted into 444,106 shares of common stock. During the year ended December 31, 2017, $549,670
of the outstanding principal and interest on Notes I and II was converted into 99,846,412 shares of common stock. The outstanding
principal and interest on Notes I and II for the years ended December 31, 2016 and 2017 were $2,128,700 and $1,579,361, respectively.
As the note conversion includes a “lesser of” pricing provision, a derivative liability of $8,936,405 was recorded
when Notes I and II were entered into. The derivative liability is re-measured at each balance sheet date and reclassified to equity
on a pro-rata basis upon conversion of the note, the derivative liability balance for Notes I and II at December 31, 2017 was $947,391.
On
December 22, 2015, in order to finance the acquisition of ENG, the Company closed a financing transaction by entering into a Securities
Purchase Agreement dated December 22, 2015 (the “Note III SPA”) for an aggregate principal amount of $904,042 and
subscription amount of $865,000, net of OID (the “Purchase Price”). The Company also reimbursed the Purchaser $30,000
for legal fees and expenses from the proceeds of the Note. Pursuant to the Note III SPA, the Company shall issue a 4% Original
Issue Discount Senior Secured Convertible Promissory Note (the “Note III”) to Dominion. Note III was issued upon payment
and will be amortized beginning six months after issuance, with amortization payments being 1/24th of the principal and accrued
interest, made in cash or common stock, on a semi-monthly basis, subject to certain conditions contained in the Note III SPA.
The amortization payments will begin to be due starting on the 15th day of the month immediately following the six-month anniversary
of the Closing Date. The Company received funding for Note III on December 24, 2015, net proceeds of $751,500 (net of the $152,542
of legal fees, expenses and OID). Note III accrues interest at a rate equal to 12% per annum (interest is guaranteed for the first
twelve months) and has a maturity date of June 15, 2017. Note III is convertible any time after its issuance date and Dominion
has the right to convert any or all of Note III into shares of the Company’s common stock at a conversion price equal to
$3,300 per share, subject to adjustment as described in Note III. Additionally, under certain conditions defined in Note III,
it may also be convertible into common stock at a price equal to 62.5% of the lowest VWAP during the 15 Trading Days immediately
prior to the applicable amortization date. In the event that there is an Event of Default or certain conditions are not met, the
conversion price will be adjusted to equal to 55% of the lowest VWAP during the thirty (30) Trading Days immediately prior to
the applicable Conversion Date. Note III can be prepaid at any time upon five days’ notice to the Dominion by paying an
amount in cash equal to the outstanding principal and interest, and a 20% premium. In connection with the issuance of the Note
III, the Company recorded a debt discount of $751,500 when Note III was entered into, related to the embedded conversion option
derivative liability. The amortization expense related to that discount recorded were approximately $510,000 in 2016 and $231,963
during the six months ended June 30, 2017. As of June 30, 2017, the total debt discount record has been fully amortized. During
the year ended December 31, 2017, $450,000 of the outstanding principal and interest was paid from the proceeds received as discussed
in Note 5. As of the years ended December 31, 2016 and 2017, the outstanding principal and interest on Note III were $1,013,000
and $562,527, respectively. As the note conversion includes a “lesser of” pricing provision, a derivative liability
of $1,267,800 was recorded when Note III was entered into. The derivative liability is re-measured at each balance sheet date,
the derivative liability balance for Note III at December 31, 2017 was $337,435.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
On
January 28, 2016, the Company closed a financing transaction by entering into a Securities Purchase Agreement dated January 28,
2016 (the “Note IV SPA”) with Dominion Capital LLC (the “Purchaser”) for an aggregate principal amount
of $2,187,500 and subscription amount of $2,100,000 (the “Purchase Price”), net of OID. Pursuant to the Note IV SPA,
the Company shall issue a series of 4% Original Issue Discount Senior Secured Convertible Promissory Notes (collectively, the
“Note IV”) to the Purchaser. The Purchase Price is scheduled to be paid in six equal monthly tranches of $350,000,
subject to the discretion of the Purchaser. Each individual Note will be issued upon payment and will be amortized beginning six
months after issuance, with amortization payments being 1/24th of the principal and accrued interest, made in cash or common stock
at the option of the Company, on a semi-monthly basis, subject to certain conditions and limitations contained in the Note IV
SPA. The amortization payments will begin on the 15th day of the month immediately following the six-month anniversary of the
Closing Date. The Company also reimbursed the Purchaser $20,000 for expenses from the proceeds of the first tranche and the Purchaser’s
counsel $10,000 from the first tranche. During the year ended December 31, 2016, the Company has received a total of $604,763
net proceeds under Note IV (net of the $93,153 of legal fees, expenses and OID). During the year ended December 31, 2017, the
Company received a total of $288,000 net proceeds (net of the $24,498 of legal fees, expenses and OID) and $24,000 of net proceeds
(net of the $2,042 of legal fees, expenses and OID) was received subsequent to the year ended December 31, 2017, under Note IV.
Note IV accrues interest at a rate equal to 12% per annum (interest is guaranteed for the first twelve months) and has a maturity
dates between July 15, 2017 and June 30, 2019. Note IV is convertible any time after its issuance date and Dominion has the right
to convert any or all of Note IV into shares of the Company’s common stock at a conversion price equal to $3,300 per share,
subject to adjustment as described in Note IV. Additionally, under certain conditions defined in Note IV, it may also be convertible
into common stock at a price equal to 62.5% of the lowest VWAP during the 15 Trading Days immediately prior to the applicable
amortization date. In the event that there is an Event of Default or certain conditions are not met, the conversion price will
be adjusted to equal to 55% of the lowest VWAP during the thirty (30) Trading Days immediately prior to the applicable Conversion
Date. Note IV can be prepaid at any time upon five days’ notice to the Dominion by paying an amount in cash equal to the
outstanding principal and interest, and a 20% premium. Subsequent to the funding of the first tranche the Purchaser and the Company
agreed to delay further tranches, until such time as the Purchaser and Company mutually agree, both as to timing and amount. In
connection with the issuances of Note IV, the Company recorded a debt discount of $874,415 when the notes were entered into, related
to the embedded conversion option derivative liability. The amortization expense related to that discount recorded during the
years ended December 31, 2016 and 2017 were approximately $263,000 and $347,667, respectively. As the note conversion includes
a “lesser of” pricing provision, a derivative liability of $1,242,562 was recorded when the issuances of Note IV was
entered into. The derivative liability is re-measured at each balance sheet date, the derivative liability balance for Note IV
at December 31, 2017 was $707,280. During the year ended December 31, 2017, $161,317 of the outstanding principal and interest
was converted into 6,825,225 shares of common stock. As of December 31, 2017, the outstanding principal and interest on Note IV
was $992,524.
Pursuant
to the Company’s obligations under Notes I, II, III and IV, the Company entered into a Security Agreement with the Purchaser,
pursuant to which the Company granted a lien on all assets of the Company, subject to existing security interests, (the “Collateral”)
for the benefit of the Purchaser, to secure the Company’s obligations under the Note. In the event of a default as defined
in Notes I, II, III and IV, the Purchaser may, among other things, collect or take possession of the Collateral, proceed with
the foreclosure of the security interest in the Collateral or sell, lease or dispose of the Collateral.
Other
Convertible Debt Financing
On
June 18, 2014, the Company closed a financing agreement whereby the Company borrowed an aggregate principal amount of $247,500
with a 10% original note discount. The note has an interest rate of 10% and is convertible at the option of the lender into shares
of the Company’s common stock at the lesser of (i) a 40% discount to the lowest closing bid price in the 20 trading days
prior to conversion or (ii) $11,250. The note might be accelerated if an event of default occurs under the terms of the note,
including the Company’s failure to pay principal and interest when due, certain bankruptcy events or if the Company is delinquent
in its SEC filings. The first tranche was funded on June 18, 2014 with a principal amount of $55,000 and net proceeds of $50,000,
with a maturity date of June 17, 2016, pursuant to the convertible note. In connection with the issuance of the note, the Company
recorded a debt discount of $50,000 related to the derivative liability which was fully amortized as of June 30, 2015. As of June
30, 2015, the outstanding principal and interest of the note was fully converted into 30 shares of common stock. As the note conversion
includes a “lesser of” pricing provision, a derivative liability of $59,623 was recorded when the note was entered
into. The derivative liability was re-measured at each balance sheet date and was reclassified to equity upon conversion of the
note. The second tranche was funded on September 19, 2014, with a principal amount of $55,000 and net proceeds of $50,000, with
a maturity date of September 19, 2015, pursuant to a convertible note. In connection with the issuance of the notes, the Company
recorded a debt discount of $50,000 related to the derivative liability which was fully amortized as of June 30, 2015. As of June
30, 2015, the outstanding principal and interest on the notes was fully converted into 47 shares of common stock. As the note
conversion includes a “lesser of” pricing provision, a derivative liability of $59,623 was recorded when the note
was entered into. The derivative liability was re-measured at each balance sheet date and was reclassified to equity upon conversion
of the note. The third tranche was funded on December 22, 2014, with a principal amount of $55,000 and net proceeds of $50,000,
with a maturity date of December 22, 2015, pursuant to a convertible note. The Company recorded a debt discount of $50,000 related
to the derivative liability which was fully amortized as of September 30, 2015. As of September 30, 2015, the outstanding principal
and interest of the note was fully converted into 39 shares of common stock. As the note conversion includes a “lesser of”
pricing provision, a derivative liability of $62,118 was recorded when the note was entered into. The derivative liability was
re-measured at each balance sheet date and was reclassified to equity upon conversion of the note. The fourth tranche was funded
on January 13, 2016, with a principal amount of $82,500 and net proceeds of $75,000, with a maturity date of January 13, 2018,
pursuant to a convertible note. In connection with the issuance of the note, the Company recorded a debt discount of $75,000,
related to the embedded conversion option derivative liability which has been fully amortized during the year ended December 31,
2016. As of December 31, 2016, the outstanding principal and interest on the note was fully converted into 693 shares of common
stock. As the note conversion includes a “lesser of” pricing provision, a derivative liability of $122,263 was recorded
when the note was entered into. The derivative liability is re-measured at each balance sheet date and reclassified to equity
on a pro-rata basis upon conversion of the note.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
On
April 6, 2015, the Company issued a new note for $166,681 convertible at the lesser of a 37.5% discount to the common stock price
on the date of the note or a 37.5% discount to the price of our common stock price at the time of conversion. In conjunction with
the purchase and assignment, the Company and Purchaser entered into a new note with a principal value of $88,319 as compensation
for Purchaser’s costs related to the purchase and assignment. This $88,319 was expensed as a loss on debt extinguishment.
In connection with the issuance of the notes, the Company recorded a debt discount of $255,000 related to the embedded conversion
option derivative liability which has been fully amortized as of December 31, 2015. As of June 30, 2016, the outstanding principal
and interest of the note was fully converted into 212 shares of common stock. As of June 30, 2016, the note has no outstanding
balance. As the note conversions includes a “lesser of” pricing provision, a derivative liability of $305,904 was
recorded when these notes were entered into. The derivative liability was re-measured at each balance sheet date and was reclassified
to equity on a pro-rata basis upon conversion of the note.
On March 9, 2016, the
Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase of two Convertible
Redeemable Notes in the aggregate principal amount of $270,400 (the “Notes”), with the first note being in the amount
of $135,200 (“Note I”) and the second note being in the amount of $135,200 (“Note II”) with a maturity
date of March 9, 2017. Pursuant to Note I, the Company received $125,000 of proceeds, net of original issue discount of $5,200
and legal fees of $5,000. Note II was initially paid for by the issuance of an offsetting $130,000 secured note issued by the
Lender to the Company (“Secured Note”). The Notes bear an interest rate of 12%; and may be at any time after 180 days
of the date of closing converted into shares of Company common stock convertible at the lesser of a 37.5% discount to the common
stock price on the date of the note or a 37.5% discount to the price of our common stock price at the time of conversion. The
Notes also contain certain representations, warranties, covenants and events of default, and increases in the amount of the principal
and interest rates under the Notes in the event of such defaults. In connection with the issuance of Note I, the Company recorded
a debt discount of $125,000, related to the embedded conversion option derivative liability which was fully amortized during the
year ended December 31, 2016. As of December 31, 2016, the outstanding principal and interest on Note I was fully converted into
40,968 shares of common stock. During the year ended December 31, 2016, the Company received $125,000 pursuant to Note II, net
of original issue discount of $5,200 and legal fees of $5,000. In connection with the issuance of Note II, the Company recorded
a debt discount of $125,000, related to the embedded conversion option derivative liability which was fully amortized as of December
31, 2016. As of December 31, 2016, $129,980 of the outstanding principal and interest on Note II was converted into 51,684 shares
of common stock. As of December 31, 2016 and 2017, Note II had an outstanding balance of $10,213 and $26,437, respectively.
As the note conversion includes a “lesser of” pricing provision, a derivative liability of $306,000 was recorded when
Notes were entered into. The derivative liability is re-measured at each balance sheet date and reclassified to equity on a pro-rata
basis upon conversion of the note, the derivative liability balance for Note II at December 31, 2017 was $15,858.
On
March 16, 2016, the Company borrowed $53,000 with a maturity date of December 18, 2016, pursuant to a financing agreement. Under
the agreement, the Company received $50,000 of proceeds, net of $3,000 legal fees. The note bears interest at 8% per annum and
is convertible at the option of the lender into shares of the Company’s common stock at a 35% discount to the price of common
shares in the ten days prior to conversion. The note also contains certain representations, warranties, covenants and events of
default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults. In connection
with the issuance of the note, the Company recorded a premium of $28,538 as the note is considered stock settled debt under ASC
480, which was fully accreted as of June 30, 2016. On August 19, 2016, the lender entered into a purchase and assignment agreement
with a third lender to sell and assign the outstanding principal and interest of $54,731 (original note). Pursuant to the purchase
and assignment agreement, the third lender and the Company amended the original note (as discussed in the paragraph below) and
issued a replacement note with a principal amount of $61,331, which includes an additional amount of $6,600 from the original
note’s outstanding balance. The additional amount was recorded as a loss on debt extinguishment. As of September 30, 2016,
the Company no longer has any outstanding debt owed to the lender. The total recorded premium was on the original note was reclassified
to equity upon extinguishment of the debt (see below replacement note).
On
August 19, 2016, The Company entered into an agreement with a lender to issue a replacement note (as discussed in the above paragraph).
The note bears an interest rate of 5%; and maybe converted into shares of Company common stock, convertible at variable conversion
price at a 40% discount of the average of the two lowest closing bid price of the common stock for the 20 trading days prior to
conversion. The note also contains certain representations, warranties, covenants and events of default, and increases in the
amount of the principal and interest rates under the Note in the event of such defaults. In connection with the issuance of replacement
note, the Company recorded a debt discount of $54,731, related to the embedded conversion option derivative liability which was
fully amortized during the year ended December 31, 2016. As of December 31, 2016, the outstanding principal and interest on Note
was fully converted into 2,618 shares of common stock. As the note conversion includes a “lesser of” pricing provision,
a derivative liability of $54,770 was recorded when the note was entered into. The derivative liability is re-measured at each
balance sheet date and reclassified to equity on a pro-rata basis upon conversion of the note.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
On
April 1, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of two Convertible Redeemable Notes in the aggregate principal amount of $270,400 (the “Notes”), with the first note
being in the amount of $135,200 (“Note I”) and the second note being in the amount of $135,200 (“Note II”).
Note I was funded on April 1, 2016, with a maturity date of April 1, 2017, pursuant to Note I, the Company received $125,000 of
net proceeds, net of original issue discount of $5,200 and legal fees of $5,000. Note II was initially paid for by the issuance
of an offsetting $130,000 secured note issued by the Lender to the Company (“Secured Note”). Note II was funded on
August 2, 2016, with a maturity date of April 1, 2017, pursuant to Note II, the Company received $125,000 of net proceeds, net
of original issue discount of $5,200 and legal fees of $5,000. The Notes bear an interest rate of 12%; and may be at any time
after 180 days of the date of closing converted into shares of Company common stock convertible at the lesser of a 37.5% discount
to the common stock price on the date of the note or a 37.5% discount to the price of our common stock price at the time of conversion.
In connection with the issuance of Notes, the Company recorded a debt discount of $250,000, related to the embedded conversion
option derivative liability. The amortization expense related to that discount recorded was approximately $172,000 for the year
ended December 31, 2016 and $77,859 during the six months ended June 30, 2017. The total debt discount recorded has been fully
amortized as of June 30, 2017. During the three months ended June 30, 2017, $27,114 of the outstanding principal and interest
on the notes was converted into 402,827 shares of common stock. The outstanding principal and interest on the Notes as of the
years ended December 31, 2016 and 2017 were $289,300 and $294,625, respectively. As the note conversion includes a “lesser
of” pricing provision, a derivative liability of $311,756 was recorded when Notes were entered into. The derivative liability
is re-measured at each balance sheet date and reclassified to equity on a pro-rata basis upon conversion of the note, the derivative
liability balance for the Notes at December 31, 2017 was $176,733.
On
April 12, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of a Convertible Redeemable Note in the aggregate principal amount of $58,000, with a maturity date of April 7, 2017, pursuant
to note, the Company will receive $50,000 of net proceeds, net of original issue discount and legal fees. The note bears an interest
rate of 5%; and is convertible at variable conversion price at a 37% discount to the common shares price on the date of the note
or at a 47% discount of the lowest trading price equal to or is lower than $750, as described in the note. The note also contains
certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest
rates under the Note in the event of such defaults. In connection with the issuance of note, the Company recorded a debt discount
of $50,000, related to the embedded conversion option derivative liability which was fully amortized during the year ended December
31, 2016. As of December 31, 2016, the outstanding principal and interest on note was fully converted into 6,513 shares of common
stock. As the note conversion includes a “lesser of” pricing provision, a derivative liability of $73,505 was recorded
when the note was entered into. The derivative liability is re-measured at each balance sheet date and reclassified to equity
on a pro-rata basis upon conversion of the note.
On
April 18, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of two Convertible Redeemable Notes in the aggregate principal amount of $126,000 (the “Notes”), with the first note
being in the amount of $63,000 (“Note I”) and the second note being in the amount of $63,000 (“Note II”).
Note I was funded on April 20, 2016, with a maturity date of April 19, 2017, pursuant to Note I, the Company received $57,000
of net proceeds, net of original issue discount of $3,000 and legal fees of $3,000. Note II was initially paid for by the issuance
of an offsetting $60,000 secured note issued by the Lender to the Company (“Secured Note”). Note II was funded on
November 29, 2016, with a maturity date of April 19, 2017, pursuant to Note II, the Company received $57,000 of net proceeds,
net of original issue discount of $3,000 and legal fees of $3,000. The Notes bear an interest rate of 10%; and maybe converted
into shares of Company common stock, convertible at variable conversion price at a 35% discount of the lowest closing bid price
of the common stock for the 15 trading days prior to conversion. The Notes also contain certain representations, warranties, covenants
and events of default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults.
In connection with the issuance of the notes, the Company recorded a premium of $37,846 as the notes are considered stock settled
debt under ASC 480, which was fully accreted as of December 31, 2016. During the year ended December 31, 2016, the outstanding
principal and interest on the notes was fully converted into 46,959 shares of common stock.
On
April 18, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of two Convertible Redeemable Notes in the aggregate principal amount of $143,000 (the “Notes”), with the first note
being in the amount of $71,500 (“Note I”) and the second note being in the amount of $71,500 (“Note II”).
Note I was funded on April 18, 2016, with a maturity date of April 18, 2017, pursuant to Note I, the Company received $55,000
of net proceeds, net of original issue discount of $6,500 and legal fees of $10,000. Note II was initially paid for by the issuance
of an offsetting $65,000 secured note issued by the Lender to the Company (“Secured Note”). Note II was funded on
November 21, 2016, with a maturity date of April 18, 2017, pursuant to Note II, the Company received $49,375 of net proceeds,
net of original issue discount of $6,500 and legal fees of $15,625. The Notes bear an interest rate of 10%; and maybe converted
into shares of Company common stock, convertible at variable conversion price at a 38% discount of the average of the three lowest
closing bid price of the common stock for the 20 trading days prior to conversion. The Notes also contain certain representations,
warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the Notes in
the event of such defaults. In connection with the issuance of the Notes, the Company recorded a premium of $85,800 as the notes
are considered stock settled debt under ASC 480, which was fully accreted as of December 31, 2016. During the year ended December
31, 2016, the outstanding principal and interest of the Notes were fully converted into 45,365 shares of common stock.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
On April 28, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing
for the purchase of two Convertible Redeemable Notes in the aggregate principal amount of $437,500 (the “Notes”), with
the first note being in the amount of $218,750 (“Note I”) and the second note being in the amount of $218,750 (“Note
II”). Note I was funded on April 28, 2016, with a maturity date of April 27, 2017, pursuant to Note I, the Company received
$190,000 of net proceeds, net of original issue discount of $8,750 and legal fees of $20,000. Note II was initially paid for by
the issuance of an offsetting $210,000 secured note issued by the Lender to the Company (“Secured Note”). Note II was
funded on September 7, 2016, with a maturity date of April 27, 2017, pursuant to Note II, the Company received $200,000 of net
proceeds, net of original issue discount of $8,750 and legal fees of $10,000. The Notes bear an interest rate of 12%; and may be
at any time after 180 days of the date of closing converted into shares of Company common stock convertible at the lesser of a
37.5% discount to the common stock price on the date of the note or a 37.5% discount to the price of our common stock price at
the time of conversion. In connection with the issuance of the Notes, the Company recorded a debt discount of $390,000, related
to the embedded conversion option derivative liability. The amortization expense related to that discount recorded was approximately
$247,000 in 2016 and $143,000 during the three months ended March 31, 2017. The recorded debt discount was fully amortized as of
March 31, 2017. In 2016, $21,453 of the outstanding principal and interest of the note was converted into 12,713 shares of common
stock. During the year ended December 31, 2017, $424,426 of the outstanding principal and interest of the notes was converted into
4,455,017 shares of common stock. As of December 31, 2016 and 2017, the outstanding principal and interest on the Notes were $442,080
and $45,518, respectively. As the note conversion includes a “lesser of” pricing provision, a derivative liability
of $499,800 was recorded when Notes were entered into. The derivative liability is re-measured at each balance sheet date and reclassified
to equity on a pro-rata basis upon conversion of the note, the derivative liability balance for the Notes at December 31, 2017
was $27,304.
On
May 4, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of two Convertible Redeemable Notes in the aggregate principal amount of $126,000 (the “Notes”), with the first note
being in the amount of $63,000 (“Note I”) and the second note being in the amount of $63,000 (“Note II”).
Note I was funded on May 4, 2016, with a maturity date of May 4, 2017, pursuant to Note I, the Company received $57,000 of net
proceeds, net of original issue discount of $3,000 and legal fees of $3,000. Note II was initially paid for by the issuance of
an offsetting $60,000 secured note issued by the Lender to the Company (“Secured Note”). Note II was funded on November
22, 2016, with a maturity date of May 4, 2017, pursuant to Note II, the Company received $57,000 of net proceeds, net of original
issue discount of $3,000 and legal fees of $3,000. The Notes bears an interest rate of 10%; and maybe converted into shares of
Company common stock, convertible at variable conversion price at a 37.5% discount of the lowest closing bid price of the common
stock for the 15 trading days prior to conversion. The Notes also contain certain representations, warranties, covenants and events
of default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults. In
connection with the issuance of the notes, the Company recorded a premium of $75,600 as the notes are considered stock settled
debt under ASC 480 which was fully accreted as of December 31, 2016. During the year ended December 31, 2016, the outstanding
principal and interest on the notes were fully converted into 58,856 shares of common stock. The notes had no outstanding balance
as of December 31, 2016.
On May 17, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing
for the purchase of a Convertible Redeemable Notes with the principal amount of $55,000 (the “Note”). The Note was
funded on May 19, 2016, with a maturity date of May 17, 2017, pursuant to Note, the Company received $49,500 of net proceeds, net
of $5,500 legal fees. The Note bears an interest rate of 10%; and maybe converted into shares of Company common stock, convertible
at variable conversion price at a 35% discount of the lowest closing bid price of the common stock for the 20 trading days prior
to conversion. The Notes also contain certain representations, warranties, covenants and events of default, and increases in the
amount of the principal and interest rates under the Notes in the event of such defaults. In connection with the issuance of the
note, the Company recorded a premium of $29,615 as the note is considered stock settled debt under ASC 480, which was fully accreted
as of September 30, 2016. During the year ended December 31, 2016, the outstanding principal and interest on the notes were fully
converted into 26,971 shares of common stock. The note had no outstanding balance as of December 31, 2016.
On June 3, 2016, the Company
closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase of two Convertible Redeemable
Notes in the aggregate principal amount of $624,000 (the “Notes”), with the first note being in the amount of $312,000
(“Note I”) and the second note being in the amount of $312,000 (“Note II”). Note I was funded on June
3, 2016, with a maturity date of June 2, 2017, pursuant to Note I, the Company received $285,000 of net proceeds, net of original
issue discount of $12,000 and legal fees of $15,000. Note II was initially paid for by the issuance of an offsetting $300,000
secured note issued by the Lender to the Company (“Secured Note”). Note II was funded in two tranches during the year
ended December 31, 2016, with a maturity date of June 2, 2017, pursuant to Note II, the Company received $285,000 of net proceeds,
net of original issue discount of $12,000 and legal fees of $15,000. The Notes bear an interest rate of 12%; and may be at any
time after 180 days of the date of closing converted into shares of Company common stock convertible at the lesser of a 35% discount
to the common stock price on the date of the note or a 35% discount to the price of our common stock price at the time of conversion.
The Notes also contain certain representations, warranties, covenants and events of default, and increases in the amount of the
principal and interest rates under the Notes in the event of such defaults. In connection with the issuance of the Notes, the
Company recorded a debt discount of $570,000, related to the embedded conversion option derivative liability. The amortization
expense related to that discount recorded was approximately $288,000 in 2016 and $282,000 for the six months ended June 30, 2017
and the total debt discount recorded was fully amortized as of June 30, 2017. In 2016, $129,298 of the outstanding principal and
interest of the notes was converted into 119,675 shares of common stock. During the year ended December 31, 2017, $301,537 of
the outstanding principal and interest of the notes was converted into 12,383,428 shares of common stock. As of December 31, 2016
and 2017, the outstanding principal and interest on the Notes were $519,860 and $256,181, respectively. As the note conversion
includes a “lesser of” pricing provision, a derivative liability of $755,690 was recorded when Notes was entered into.
The derivative liability is re-measured at each balance sheet date and reclassified to equity on a pro-rata basis upon conversion
of the note, the derivative liability balance for the Notes at December 31, 2017 was $153,672.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
On June 22, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing
for the purchase of two Convertible Redeemable Notes in the aggregate principal amount of $143,000 (the “Notes”), with
the first note being in the amount of $71,500 (“Note I”) and the second note being in the amount of $71,500 (“Note
II”). Note I was funded on June 22, 2016, with a maturity date of June 17, 2017, pursuant to Note I, the Company received
$57,000 of net proceeds, net of original issue discount of $6,500 and legal fees of $8,000. Note II was initially paid for by the
issuance of an offsetting $65,000 secured note issued by the Lender to the Company (“Secured Note”). The Notes bear
an interest rate of 10%; and is convertible into shares of Company common stock at the lesser of a 37.5% discount to the common
stock price on the date of the note or a 37.5% discount to the price of our common stock price at the time of conversion. The Notes
also contain certain representations, warranties, covenants and events of default, and increases in the amount of the principal
and interest rates under the Notes in the event of such defaults. In connection with the issuance of Note I, the Company recorded
a debt discount of $57,000, related to the embedded conversion option derivative liability which was fully amortized during the
year ended December 31, 2016. As of December 31, 2016, the Company exercised its right to prepay the outstanding principal and
interest for a total redemption amount of $74,968. The Company recorded a loss on extinguishment of approximately $25,000. The
note had no outstanding balance as of December 31, 2016. As the note conversion includes a “lesser of” pricing provision,
a derivative liability of $72,607 was recorded when Note I was entered into. The derivative liability is re-measured at each balance
sheet date and reclassified to equity on a pro-rata basis upon conversion or redemption of the note.
On July 5, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing
for the purchase of two Convertible Redeemable Notes in the aggregate principal amount of $416,000 (the “Notes”), with
the first note being in the amount of $208,000 (“Note I”) and the second note being in the amount of $208,000 (“Note
II”) with a maturity date of July 30, 2017. Pursuant to Note I, the Company received $190,000 of proceeds, net of original
issue discount of $8,000 and legal fees of $10,000. Note II was initially paid for by the issuance of an offsetting $200,000 secured
note issued by the Lender to the Company (“Secured Note”). Pursuant to Note II, the Company received $190,000 of proceeds,
net of original issue discount of $8,000 and legal fees of $10,000 Note II during the three months ended March 31, 2017. The Notes
bear an interest rate of 12%; and may be at any time after 180 days of the date of closing converted into shares of Company common
stock convertible at the lesser of a 37.5% discount to the common stock price on the date of the note or a 37.5% discount to the
price of our common stock price at the time of conversion. The Notes also contain certain representations, warranties, covenants
and events of default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults.
In connection with the issuance of the Notes, the Company recorded a debt discount of $380,000, related to the embedded conversion
option derivative liability. The amortization expense related to that discount recorded was approximately $97,000 in 2016 and $282,939
for the year ended December 31, 2017 and the total debt discount recorded was fully amortized as of September 30, 2017. During
the year ended December 31, 2017, $248,793 of the outstanding principal and interest of the note was converted into 29,129,990
shares of common stock. As of December 31, 2017, the outstanding principal and interest on the notes was $226,546. As the note
conversion includes a “lesser of” pricing provision, a derivative liability was also recorded in the amount of $360,552.
The derivative liability at December 31, 2017 for the Notes was $135,896.
On
July 6, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of two Convertible Redeemable Notes in the aggregate principal amount of $132,300 (the “Notes”), with the first note
being in the amount of $66,150 (“Note I”) and the second note being in the amount of $66,150 (“Note II”)
with a maturity date of July 7, 2017. Pursuant to Note I, the Company received $60,000 of net proceeds, net of original issue
discount of $3,150 and legal fees of $3,000. Note II was initially paid for by the issuance of an offsetting $63,000 secured note
issued by the Lender to the Company (“Secured Note”). The Notes bear an interest rate of 10%; and maybe converted
into shares of Company common stock, convertible at variable conversion price at a 35% discount of the lowest closing bid price
of the common stock for the 15 trading days prior to conversion. The Notes also contain certain representations, warranties, covenants
and events of default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults.
In connection with the issuance of Note I, the Company recorded a premium of $35,619 as the note is considered stock settled debt
under ASC 480, which was fully accreted as of September 30, 2016. As of December 31, 2016 and 2017, the outstanding principal
and interest on the note were $69,460 and $76,073, respectively.
On August 1, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing
for the purchase of a Convertible Redeemable Note with a principal amount of $52,500 (the “Note”) and maturity date
of April 29, 2017, pursuant to Note, the Company received $50,000 of net proceeds, net of original issue discount of $2,500. The
Note bears an interest rate of 10%; and maybe converted into shares of Company common stock, convertible at variable conversion
price at a 37.5% discount of the three lowest closing bid prices of the common stock for the 20 trading days prior to conversion.
The Note also contain certain representations, warranties, covenants and events of default, and increases in the amount of the
principal and interest rates under the Note in the event of such defaults. In connection with the issuance of the note, the Company
recorded a premium of $31,500 as the note is considered stock settled debt under ASC 480, which was fully accreted as of September
30, 2016. During the year ended December 31, 2017, $6,250 of the outstanding principal and interest of the note was converted into
8,333 shares of common stock. As of December 31, 2016 and 2017, the outstanding principal and interest on the note were $55,130
and $55,175, respectively.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
On August 11, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender,
providing for the purchase of a Secured Convertible Promissory Note in the aggregate principal amount of up to $330,000, which
shall be funded in six tranches, each amounting to $50,000. The Note has a 10% original issuance discount to offset transaction,
diligence and legal costs. The Note bears an interest rate of 10% and the maturity date for each funded tranche will be 12 months
from the date on which the funds are received by the Company. Then note is convertible into shares of Company’s common stock
at a 37.5% discount to the lowest volume-weighted average price for the Company’s common stock during the 15 trading days
immediately preceding a conversion date. The Note also contain certain representations, warranties, covenants and events of default,
and increases in the amount of the principal and interest rates under the Note in the event of such defaults. In 2016, the Company
had received three of the six tranches amounting to $150,000 of net proceeds, net of the original issue discount of $15,000. The
funded tranches have maturity dates between August 17, 2017 and September 13, 2017. In connection with the issuance of the note,
the Company recorded a premium of $99,000 as the note is considered stock settled debt under ASC 480, which was fully accreted
during as of September 30, 2016. As of December 31, 2016, the outstanding principal and interest on the note was $171,420. During
the year ended December 31, 2017, the remaining outstanding principal and interest of $186,453 was fully converted into 31,126,000
shares of common stock. The note had no outstanding balance as of December 31, 2017.
On August 17, 2016, the Company closed a Securities Purchase Agreement (“SPA”) with a lender,
providing for the purchase of two Convertible Redeemable Notes in the aggregate principal amount of $105,264 (the “Notes”),
with the first note being in the amount of $52,632 (“Note I”) and the second note being in the amount of $52,632 (“Note
II”). Note I was funded on August 17, 2016, with a maturity date of August 17, 2017, pursuant to Note I, the Company received
$45,000 of net proceeds, net of original issue discount of $2,632 and legal fees of $5,000. Note II was initially paid for by the
issuance of an offsetting $50,000 secured note issued by the Lender to the Company (“Secured Note”). Note II was funded
on February 17, 2017, with a maturity date of August 17, 2017, pursuant to Note II, the Company received $45,000 of net proceeds,
net of original issue discount of $2,632 and legal fees of $5,000. The Notes bear an interest rate of 10%; and is convertible into
shares of Company common stock at the lesser of a 37.5% discount to the common stock price on the date of the note or a 37.5% discount
to the price of our common stock price at the time of conversion. The Notes also contain certain representations, warranties, covenants
and events of default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults.
In connection with the issuance of the Notes, the Company recorded a debt discount of $76,189 related to the embedded conversion
option derivative liability. The amortization expense related to that discount recorded was $15,960 in 2016 and $60,229 for the
six months ended June 30, 2017. The total debt discount recorded was fully amortized as of June 30, 2017. As of December 31, 2016,
the outstanding principal and interest on Note I was $54,590. During the year ended December 31, 2017, the remaining balance of
the outstanding principal and interest of $108,950 was fully converted into 441,619 shares of common stock. The note had no outstanding
balance as of December 31, 2017. As the note conversion includes a “lesser of” pricing provision, a derivative liability
of $112,277 was recorded when the notes were entered into. The derivative liability is re-measured at each balance sheet date and
reclassified to equity on a pro-rata basis upon conversion of the note.
On
November 30, 2016,
the Company closed a Securities
Purchase Agreement (“SPA”) with a lender
, providing for the purchase of three
Convertible Redeemable Notes in the aggregate principal amount of $183,750 (the “Notes”), with the first note being
in the amount of $52,500 (“Note I”), the second note being in the amount of $52,500 (“Note II”), and the
third note being in the amount of $78,750 (“Note III”).
Note I was funded on November 30, 2016, with a maturity
date of December 30, 2017, pursuant to Note I, the Company received $45,000 of net proceeds, net of original issue discount of
$3,150 and legal fees of $3,000.
Note II was initially paid for by the issuance of an offsetting
$50,000 secured note issued to the Company by the lender (“Secured Note”) and Note III was initially be paid for by
the issuance of an offsetting $75,000 secured note issued to the Company by the lender. Funding of Note II and Note III is subject
to the mutual agreement of the lender and the Company. The lender is required to pay the principal amount of the Secured Notes
in cash and in full prior to executing any conversions under Note II and Note III. The Notes bear an interest rate of 10% and
are due and payable on November 30, 2017. The Notes may be converted by the lender at any time into shares of Company’s
common stock (as determined in the Notes) calculated at the time of conversion, except for Note II and Note III, which require
full payment of the Secured Notes by the lender before conversions may be made. The Notes (subject to funding in the case of Note
II and Note III)
is convertible into shares of Company’s common stock at a 37.5% discount to the
lowest
closing bid price of the common stock 15 prior trading days including the day upon which a notice of conversion is received by
the Company.
In connection with the issuance of the note, the Company recorded a premium of $31,500 as the note is considered
stock settled debt under ASC 480, which was fully accreted as of December 31, 2016. As of December 31, 2016 and 2017, the outstanding
principal and interest on the note were $53,375 and $58,625, respectively.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
On January 18, 2017,
the Company
closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the
purchase of two Convertible Redeemable Notes in the aggregate principal amount of $200,000 (the “Notes”), with the
first note being in the amount of $100,000 (“Note I”), and the second note being in the amount of $100,000 (“Note
II”). Note I was funded on January 18, 2017, with the Company receiving $70,000 of net proceeds (net of legal fees and OID).
Note II will initially be paid for by the issuance of an offsetting $88,000 secured note issued to the Company by the lender (the
“Secured Note”). The funding of Note II is subject to the mutual agreement of the lender and the Company which has
not occurred as of December 31, 2017. The lender is required to pay the principal amount of the Secured Note in cash and in full
prior to executing any conversions under Note II. The Notes bear an interest rate of 10% and are due and payable on January 13,
2018. The Note may be converted by the lender at any time into shares of Company’s common stock at a price equal to
the
lesser of a 37.5% discount to the common stock price on the date of the note or a 37.5% discount
of
the lowest trading price for the Company’s common stock 20 days prior trading days including the day upon which a notice
of conversion is received by the Company.
The Notes also contain certain representations, warranties, covenants and events
of default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults. In connection
with the issuance of Note I, the Company recorded a debt discount of $70,000 related to the embedded conversion option derivative
liability. The amortization expense related to that discount recorded was approximately $70,000 for the year ended December 31,
2017 and the total debt discount recorded was fully amortized as of December 31, 2017. During the year ended December 31, 2017,
the outstanding principal and interest of $107,145 was fully converted into 15,819,000 shares of common stock and Note I had no
outstanding balance as of December 31, 2017. As the note conversion includes a “lesser of” pricing provision, a derivative
liability of $99,742 was recorded when Note I was entered into. The derivative liability is re-measured at each balance sheet date
and reclassified to equity on a pro-rata basis upon conversion of the note.
On
January 31, 2017,
the Company
closed
a Securities Purchase Agreement (“SPA”) with a lender, dated January 30, 2017, providing for the purchase of a Secured
Convertible Promissory Note (the “Note”), in the aggregate principal amount of $412,500. The Note was fully funded
as of March 31, 2017, with the Company receiving $375,000 of net proceeds (net of OID). The Note has a 10% original issuance discount
to offset transaction, diligence and legal costs. The Note bears an interest rate of 10% and matures12 months after the tranches
are funded. The Note may be converted by the lender at any time into shares of Company’s common stock at a price equal to
62.5% of the lowest closing bid price for the Company’s common stock during the 20 trading days immediately preceding a
conversion date.
In connection with the issuance of the note, the Company recorded a premium of $247,500 as the note is
considered stock settled debt under ASC 480, which was fully accreted as of March 31, 2017. During the year ended December 31,
2017, $262,181 of the outstanding principal and interest of the note was converted into 62,425,000 shares of common stock. As
of December 31, 2017, the outstanding principal and interest on the note was $183,776.
On
February 15, 2017
,
the Company
entered into an agreement with a lender, providing for the issuance of
a
non-cash
Convertible Redeemable Note with the principal amount of $15,000 (the
“Note”) as penalty interest. The Note bears an interest rate of 10% and matures on February 17, 2018. The Note may
be converted by the lender at any time into shares of Company’s common stock at a stock at a price equal to
the lesser
of a 37.5% discount to the common stock price on the date of the note or a 37.5% discount
of
the lowest trading price for the Company’s common stock 15 days prior trading days including the day upon which a notice
of conversion is received by the Company.
The Note also contain certain representations, warranties, covenants and events
of default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults. In
connection with the issuance of the Note, the Company recorded a debt discount of $8,976 related to the embedded conversion option
derivative liability. The amortization expense related to that discount recorded was $8,259 for the year ended December 31, 2017.
As of December 31, 2017, the outstanding principal and interest on the Note was $16,303. As the note conversion includes a “lesser
of” pricing provision, a derivative liability of $8,976 was recorded when the Note was entered into. The derivative liability
is re-measured at each balance sheet date and reclassified to equity on a pro-rata basis upon conversion of the note, the derivative
liability balance for the Note at December 31, 2017 was $9,811.
On
March 14, 2017, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of two Convertible Redeemable Notes in the aggregate principal amount of $104,000 (the “Notes”), with the first note
being in the amount of $52,000 (“Note I”) and the second note being in the amount of $52,000 (“Note II”)
with a maturity date of March 14, 2018. Note I was funded on March 14, 2017, with the Company receiving $47,500 of proceeds, net
of OID of $2,000 and legal fees of $2,500. Note II was initially paid for by the issuance of an offsetting $52,000 secured note
issued by the lender to the Company (“Secured Note”). Note II was funded on May 3, 2017, with the Company receiving
$47,500 of proceeds, net of OID of $2,000 and legal fees of $2,500. The Notes bear an interest rate of 12%; and may converted
be at any time after 180 days of the date of closing converted into shares of Company common stock convertible at the lesser of
a 37.5% discount to the common stock price on the date of the note or a 37.5% discount to the price of our common stock price
at the time of conversion. The Notes also contain certain representations, warranties, covenants and events of default, and increases
in the amount of the principal and interest rates under the Notes in the event of such defaults. In connection with the issuance
of Notes, the Company recorded a debt discount of $86,964 related to the embedded conversion option derivative liability. The
amortization expense related to that discount recorded was approximately $81,179 during the year ended December 31, 2017. During
the year ended December 31, 2017, $55,774 of the outstanding principal and interest of the note was converted into 12,276,601
shares of common stock. As of December 31, 2017, the outstanding principal and interest on the Notes was $57,407. As the note
conversion includes a “lesser of” pricing provision, a derivative liability of $97,555 was recorded when the Notes
were entered into. The derivative liability is re-measured at each balance sheet date and reclassified to equity on a pro-rata
basis upon conversion of the notes, the derivative liability balance for the Notes at December 31, 2017 was $34,438.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
On March 24, 2017
,
the Company
closed
a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase of two Convertible Redeemable Notes
in the aggregate principal amount of
$89,150
(the “Notes”), with the first
note being in the amount of
$44,575
(“Note I”), and the second note being
in the amount of
$44,575
(“Note II”). Note I was funded on March 27, 2017,
with the Company receiving
$35,000
of net proceeds (net of legal fees and OID). Note
II will initially be paid for by the issuance of an offsetting
$39,250
secured note
issued to the Company by the lender (the “Secured Note”). The funding of Note II is subject to the mutual agreement
of the lender and the Company. The lender is required to pay the principal amount of the Secured Note in cash and in full prior
to executing any conversions under Note II. The Notes bear an interest rate of 10% and are due and payable
December 24,
2017
. The Note may be converted by the lender at any time into shares of Company’s
common stock at a price equal to 62.5% of the lowest closing bid price for the Company’s common stock during the 20 days
prior trading days including the day upon which a notice of conversion is received by the Company.
In connection with the
issuance of the note, the Company recorded a premium of $26,746 as the note is considered stock settled debt under ASC 480, which
was fully accreted as of March 31, 2017. During the year ended December 31, 2017, $24,906 of the outstanding principal and interest
of the note was converted into 20,500,000 shares of common stock. As of December 31, 2017, the outstanding principal and interest
on the note was $23,012.
On April 10, 2017, the Company closed a Securities Purchase Agreement (“SPA”) with a
lender
providing for the purchase of two Convertible Redeemable Notes in the aggregate principal amount of $77,792 (the “Notes”),
with the first note being in the amount of $38,896 (“Note I”), and the second note being in the amount of $38,896 (“Note
II”). Note I was funded April 10, 2017, with the Company receiving $34,250 of net proceeds (net of OID). Note II will initially
be paid for by the issuance of an offsetting $34,250 secured note issued to the Company by the
lender
(the “Secured Note”). The funding of Note II is subject to the mutual agreement of the
lender
and the Company which has not occurred as December 31, 2017. The
lender
is
required to pay the principal amount of the Secured Note in cash and in full prior to executing any conversions under Note II.
The Notes bear an interest rate of 10% and are due and payable on January 10, 2018. The Notes may be converted by the
lender
at any time into shares of Company’s common stock (as determined in the Notes) calculated at the time of conversion,
except for Note II, which requires full payment of the Secured Note by the
lender
before
conversions may be made. The Notes (subject to funding in the case of Note II) may be converted
by
the lender at any time into shares of Company’s common stock at a price equal to 62.5% of the lowest closing bid price for
the Company’s common stock during the 20 days prior trading days including the day upon which a notice of conversion is received
by the Company.
In connection with the issuance of the note, the Company recorded a premium of $23,338 as the notes is considered
stock settled debt under ASC 480, which was fully accreted as of June 30, 2017. During the year ended December 31, 2017, the outstanding
principal and interest of $41,291 was fully converted into 15,921,000 shares of common stock. The note had no outstanding balance
as of December 31, 2017.
On
April 17, 2017, the Company closed a Securities Purchase Agreement (“SPA”) with a
lender
,
providing for the purchase of a Secured Convertible Promissory Note in the aggregate principal amount of up to $165,000 (“Note”),
The Note was fully funded as of December 31, 2017
,
with
the Company receiving $150,000 of net total proceeds (net of 10% OID)
. The Note bears an interest rate of 10%, which is
payable in the Company’s common stock based on the conversion formula (as defined below), and the maturity date for each
funded tranche will be 12 months from the date on which the funds are received by the Company. The Note may be converted by the
lender
at any time into shares of Company’s common stock at a 37.5% discount
off the lowest closing bid price for the Company’s common stock during the 20 trading days immediately preceding a conversion
date. In connection with the issuance of the note, the Company recorded a premium of $99,000 as the note is considered stock settled
debt under ASC 480, which was fully accreted as of September 30, 2017. As of December 31, 2017, the outstanding principal and
interest on the note was $175,054.
On May 2, 2017, the Company entered into a Securities Purchase Agreement (“SPA”) with a
lender
,
providing for the purchase of two Convertible Redeemable Notes in the aggregate principal amount of $64,205 (the “Notes”),
with the first note being in the amount of $32,102 (“Note I”), and the second note being in the amount of $32,102 (“Note
II”). Note I was funded on May 3, 2017, and Note II was funded on October 31, 2017, with the Company receiving $51,250 of
net total proceeds (net of OID and legal fees). The Notes bear an interest rate of 10% and are due and payable on February 2, 2018.
The Notes may be converted by the
lender
at any time into shares of Company’s
common stock at a price equal to 62.5% of the lowest closing bid price of the common stock for the 20 prior trading days including
the day upon which a notice of conversion is received by the Company. In connection with the issuance of the note, the Company
recorded a premium of $38,522 as the notes are considered stock settled debt under ASC 480, which was fully accreted upon note
inception. As of December 31, 2017, the outstanding principal and interest on the note was $66,879.
On May 22, 2017, the Company entered into a Securities Purchase Agreement (“SPA”) with a
lender
for the purchase of a Convertible Redeemable Note in the aggregate principal amount of $50,000 (the “Note”). The Note
was funded on May 25, 2017, with the Company receiving $45,000 of net proceeds (net of OID and legal fees). The Note bears an interest
rate of 10% and is due and payable on May 22, 2018. The Note may be converted by the
lender
at any time into shares of Company’s common stock (as determined in the Note) at a price equal to 65% of the lowest
closing bid price of the common stock for the 20 prior trading days including the day upon which a notice of conversion is received
by the Company. In connection with the issuance of the note, the Company recorded a premium of $26,923 as the note is considered
stock settled debt under ASC 480, which was fully accreted as of June 30, 2017. During the year ended December 31, 2017, the Company
exercised its right to prepay the outstanding principal and interest for a total redemption amount of $69,911 and recorded a loss
on extinguishment of debt in the amount of $17,500. The note had no outstanding balance as of December 31, 2017.
On
May 23, 2017, the Company entered into a Securities Purchase Agreement with a
lender
for the purchase of a Convertible Promissory Note in the aggregate principal amount of $53,000 (the “Note”). The Note
has been funded, with the Company receiving $50,000 of net proceeds (net of fees). The Note bears an interest rate of 8% and is
due and payable on May 23, 2018. The Note may be converted by the
lender
at any time
into shares of Company’s common stock (as determined in the Note) at a price equal to 65% of the average of the lowest five
closing bid prices of the common stock for the 10 prior trading days upon which a notice of conversion is received by the Company.
In connection with the issuance of the note, the Company recorded a premium of $28,538 as the note is considered stock settled
debt under ASC 480, which was fully accreted as of June 30, 2017. As of December 31, 2017, the outstanding principal and interest
on the note was $55,562.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
On June 6, 2017, the Company entered into a Securities Purchase Agreement (“SPA”) with a
lender,
providing for the purchase of two Convertible Redeemable Notes in the aggregate principal amount of $104,000 (the “Notes”),
with the first note being in the amount of $52,000 (“Note I”), and the second note being in the amount of $52,000 (“Note
II”). Note I was funded on June 6, 2017 and Note II was funded on August 10, 2017, with the Company receiving $95,000 of
aggregate net proceeds (net of OID and fees). The Notes bear an interest rate of 12% and are due and payable on June 6, 2018. The
Notes may be converted by the
lender
at any time into shares of Company’s common
stock at a price equal to 62.5% of the lowest closing bid price of the common stock for the 15 prior trading days including the
day upon which a notice of conversion is received by the Company. In connection with the issuance of the Notes, the Company recorded
a premium of $62,400 as the notes are considered stock settled debt under ASC 480, which was fully accreted upon issuance of the
Notes. During the year ended December 31, 2017, $55,256 of the outstanding principal and interest on the note was converted into
40,317,657 shares of common stock, As of December 31, 2017, the outstanding principal and interest on the note was $54,600.
On
July 17, 2017, the Company entered into a Securities Purchase Agreement (“SPA”) with a lender for the purchase of
a Convertible Promissory Note in the aggregate principal amount of $53,000 (the “Note”). The Note has been funded,
with the Company receiving $50,000 of net proceeds (net of fees). The Note bears an interest rate of 8% and is due and payable
on April 30, 2018. The Note may be converted by the lender at any time into shares of Company’s common stock (as determined
in the Note) at a price equal to 65% of the average of the lowest five closing bid prices of the common stock for the 10 trading
days ending on the latest complete trading day prior to the conversion date. In connection with the issuance of the note, the
Company recorded a premium of $28,538 as the note is considered stock settled debt under ASC 480, which was fully accreted upon
issuance of the Note. As of December 31, 2017, the outstanding principal and interest on the note was $54,943.
On
August 8, 2017, the Company entered into a Securities Purchase Agreement (“SPA”) with a lender for the purchase of
a Convertible Promissory Note in the aggregate principal amount of $55,000 (the “Note”). The Note has been funded,
with the Company receiving $50,000 of net proceeds (net of fees). The Note bears an interest rate of 12% and is due and payable
on April 8, 2018. The Note may be converted by the lender at any time into shares of Company’s common stock (as determined
in the Note) at a price equal to 62.5% of the lowest closing bid prices of the common stock for the 20 prior trading days
including
the day upon which a notice of conversion is received by the Company.
In connection with the issuance of the note, the
Company recorded a premium of $33,000 as the note is considered stock settled debt under ASC 480, which was fully accreted upon
note inception. As of December 31, 2017, the outstanding principal and interest on the note was $57,750.
On
August 11, 2017, the Company closed a Securities Purchase Agreement (“SPA”) with a lender, providing for the purchase
of two Convertible Redeemable Notes in the aggregate principal amount of $94,500 (the “Notes”), with the first note
being in the amount of $47,250 (“Note I”) and the second note being in the amount of $47,250 (“Note II”)
with a maturity date of August 11, 2018. Note I and Note II were funded on September 11, 2017 and October 19, 2017, respectively,
with the Company receiving, for each note, net proceeds of $40,000 (net of OID and legal fees) and an aggregate net proceeds of
$80,000 (net of OID and legal fees). The Notes bear an interest rate of 12%; and may converted be at any time into shares of Company
common stock, convertible at the lesser of a 37.5% discount to the common stock price on the date of the note or a 37.5% discount
to the price of our common stock price at the time of conversion. The Notes also contain certain representations, warranties,
covenants and events of default, and increases in the amount of the principal and interest rates under the Notes in the event
of such defaults. In connection with the issuance of note, the Company recorded a debt discount of $46,588 related to the embedded
conversion option derivative liability. The amortization expense related to that discount recorded was $18,128 during the year
ended December 31, 2017. As of December 31, 2017, the outstanding principal and interest on the Notes was $98,011. As the note
conversion includes a “lesser of” pricing provision, a derivative liability of $46,588 was recorded when the Notes
were entered into. The derivative liability is re-measured at each balance sheet date and reclassified to equity on a pro-rata
basis upon conversion of the notes, the derivative liability balance for the note at December 31, 2017 was $46,755.
On
August 21, 2017, the Company entered into a Securities Purchase Agreement (“SPA”) with a lender for the purchase of
a Convertible Promissory Note in the aggregate principal amount of $53,000 (the “Note”). The Note was funded on August
22, 2017, with the Company receiving $50,000 of net proceeds (net of fees). The Note bears an interest rate of 8% and is due and
payable on May 30, 2018. The Note may be converted by the lender at any time into shares of Company’s common stock (as determined
in the Note) at a price equal to 65% of the average of the lowest five closing bid prices of the common stock for the 10 trading
days ending on the latest complete trading day prior to the conversion date. In connection with the issuance of the note, the
Company recorded a premium of $28,538 as the note is considered stock settled debt under ASC 480, which was fully accreted upon
note inception. As of December 31, 2017, the outstanding principal and interest on the note was $54,590.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
On
September 11, 2017, the Company entered into a Securities Purchase Agreement (“SPA”) with a
lender,
providing for the purchase of a Secured Convertible Promissory Note in the aggregate principal amount of up to $137,500
(the “Note”), with the first and second tranche funded on September 15, 2017 and October 16, 2017, respectively, with
the Company receiving $125,000
of net proceeds (net of OID)
.
The
Note has a 10% original issuance discount to offset transaction, diligence and legal costs. The Note bears an interest rate of
10% and matures twelve months after the tranches are funded. The Note may be converted by the lender at any time into shares of
Company’s common stock at a price equal to 62.5% of the lowest closing bid price for the Company’s common stock during
the 20 trading days immediately preceding a conversion date.
In connection with the issuance of the note, the Company recorded
a premium of $82,500 as the Note is considered stock settled debt under ASC 480, which was fully accreted upon note inception.
As of December 31, 2017, the outstanding principal and interest on the note was $141,070.
On September 12, 2017, the Company entered into a Securities Purchase Agreement (“SPA”) with a
lender,
providing for the purchase of two Convertible Redeemable Notes in the aggregate
principal amount of $104,000 (the “Notes”), with the first note being in the amount of $52,000 (“Note I”),
and the second note being in the amount of $52,000 (“Note II”). Note I was funded on September 12, 2017 and Note II
was funded on September 27, 2017, with the Company receiving $47,500 of net proceeds (net of OID and legal fees) for each note
and aggregate net proceeds of $95,000. The Notes bear an interest rate of 12% and are due and payable on September 12, 2018. The
Notes may be converted by the
lender
at any time into shares of Company’s common
stock at a price equal to 62.5% of the lowest closing bid price of the common stock for the 15 prior trading days including the
day upon which a notice of conversion is received by the Company. In connection with the issuance of the Notes, the Company recorded
a premium of $62,400 as the notes are considered stock settled debt under ASC 480, which was fully accreted upon note inception.
As of December 31, 2017, the outstanding principal and interest on the note was $107,120.
On October 2, 2017, the Company entered into a Securities Purchase Agreement (“SPA”) with a lender,
providing for the purchase of two Convertible Promissory Notes in the aggregate principal amount of $107,000 (the “Notes”),
with the first note being in the amount of $53,500 (“Note I”), and the second note being in the amount of $53,500 (“Note
II”). Note I was funded on October 3, 2017, with the Company receiving $45,000 of net proceeds (net of OID, legal and other
fees). Note II will initially be paid for by the issuance of an offsetting $50,000 note issued to the Company by the Lender (the
“Collateralized Note”). The funding of Note II is subject to the mutual agreement of the lender and the Company which
has not occurred as of December 31, 2017. The lender is required to pay the principal amount of Note I in cash and in full prior
to executing any conversions under Note II. The Notes bear an interest rate of 12% and are due and payable on October 2, 2018.
The Notes may be converted by the lender at any time into shares of Company’s common stock (as determined in the Notes) calculated
at the time of conversion, except for Note II, which requires full payment of the Collateralized Note by the lender before conversions
may be made. The Notes (subject to funding in the case of Note II) may be converted by the lender at any time into shares of Company’s
common stock price on the date of the note or 62.5% of the lowest closing bid price of the common stock for the 20 prior trading
days including the day upon which a notice of conversion is received by the Company. In connection with the issuance of note, the
Company recorded a debt discount of $33,514 related to the embedded conversion option derivative liability. The amortization expense
related to that discount recorded was $8,005 during the year ended December 31, 2017. As of December 31, 2017, the outstanding
principal and interest on the Notes was $55,065. As the note conversion includes a “lesser of” pricing provision, a
derivative liability of $33,514 was recorded when the Notes were entered into. The derivative liability is re-measured at each
balance sheet date and reclassified to equity on a pro-rata basis upon conversion of the notes, the derivative liability balance
for the note at December 31, 2017 was $57,537.
On October 11, 2017, the Company entered into a Securities Purchase Agreement (“SPA”) with a lender,
providing for the purchase of two Convertible Redeemable Notes in the aggregate principal amount of $104,000 (the “Notes”),
with the first note being in the amount of $52,000 (“Note I”), and the second note being in the amount of $52,000 (“Note
II”). Note I was funded on October 11, 2017 and Note II was funded on October 25, 2017, with the Company receiving $95,000
of net aggregate proceeds (net of OID and legal fees). The Notes bear an interest rate of 12% and are due and payable on October
11, 2018. The Notes may be converted by the lender at any time into shares of Company’s common stock (as determined in the
Notes) at a price equal to 62.5% of the lowest closing bid price of the common stock for the 20 prior trading days including the
day upon which a notice of conversion is received by the Company. In connection with the issuance of the Notes, the Company recorded
a premium of $62,400 as the notes are considered stock settled debt under ASC 480, which was fully accreted upon note inception.
As of December 31, 2017, the outstanding principal and interest on the note was $106,470.
On
November 9, 2017, the Company entered into a Securities Purchase Agreement (“SPA”) with a lender for the purchase
of a Convertible Promissory Note in the aggregate principal amount of $53,000 (“Note”). The Note was funded on November
15, 2017, with the Company receiving $50,000 of net proceeds (net of fees). The Note bears an interest rate of 8% and is due and
payable on August 30, 2018. The Note may be converted by the lender at any time into shares of Company’s common stock (as
determined in the Note) at a price equal to 65% of the average of the lowest five closing bid prices of the common stock for the
10 trading days ending on the latest complete trading day prior to the conversion date. In connection with the issuance of the
Note, the Company recorded a premium of $28,538 as the Note is considered stock settled debt under ASC 480, which was fully accreted
upon note inception. As of December 31, 2017, the outstanding principal and interest on the note was $53,530.
On
November 13, 2017, the Company entered into a Securities Purchase Agreement (“SPA”) with a lender, providing for
the purchase of two Convertible Redeemable Notes in the aggregate principal amount of $104,000 (the
“Notes”), with the first note being in the amount of $52,000 (“Note I”), and the second note being in
the amount of $52,000 (“Note II”). Note I and II were funded on November 13, 2017 and December 1, 2017,
respectively, with the Company receiving $95,000 of net aggregate proceeds (net of OID and legal fees). The Notes bear an
interest rate of 12% and are due and payable on November 13, 2018. The Notes may be converted by the lender at any time into
shares of Company’s common stock at a price equal to 62.5% of the lowest closing bid price of the common stock for the
20 prior trading days including the day upon which a notice of conversion is received by the Company. In connection with the
issuance of the Notes, the Company recorded a premium of $62,400 as the notes are considered stock settled debt under ASC
480, which was fully accreted upon note inception. As of December 31, 2017, the outstanding principal and interest on the
note was $105,300.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
On November 21, 2017, the Company entered into a Securities Purchase Agreement (“SPA”) with a
lender, providing for the purchase of a Secured Convertible Promissory Note in the aggregate principal amount of up to $137,500
(“Note”). The first and second tranche were funded on November 24, 2017 and December 15, 2017, respectively, with the
Company receiving $75,000 of net total proceeds (net of OID). The Note bears an interest rate of 10%, which is payable in the Company’s
common stock based on the conversion formula (as defined below), and the maturity date for each funded tranche will be 12 months
from the date on which the funds are received by the Company and may be converted by the lender at any time into shares of Company’s
common stock at a 37.5% discount to the lowest closing bid price for the Company’s common stock during the 20 trading days
immediately preceding a conversion date. In connection with the issuance of the Note, the Company recorded a premium of $49,500
as the notes are considered stock settled debt under ASC 480, which was fully accreted upon note inception. As of December 31,
2017, the outstanding principal and interest on the note was $83,016.
On
November 21, 2017, the Company entered into a Securities Purchase Agreement (“SPA”) with a lender, providing for the
purchase of a Convertible Redeemable Notes in the aggregate principal amount of $57,750 (“Note”). The Note was funded
on November 21, 2017, with the Company receiving $50,000 of net proceeds (net of OID and legal fees). The Note bears an interest
rate of 12% and is due and payable on August 21, 2018. The Note may be converted by the lender at any time into shares of Company’s
common stock (as determined in Note) at a 37.5% discount to the lowest closing bid price of the common stock for the 20 prior
trading days including the day upon which a notice of conversion is received by the Company. In connection with the issuance of
the Note, the Company recorded a premium of $34,650 as the Note is considered stock settled debt under ASC 480, which was fully
accreted upon note inception. As of December 31, 2017, the outstanding principal and interest on the note was $58,520.
On
December 6, 2017 the Company entered into a Securities Purchase Agreement (“SPA”) with a lender, providing for the
purchase of a Convertible Redeemable Notes in the aggregate principal amount of $38,500 (“Note”). The Note was funded
on December 13, 2017, with the Company receiving $36,120 of net proceeds (net of fees). The Note bears an interest rate of 10%
and is due and payable on December 6, 2018. The Note may be converted by the lender at any time into shares of Company’s
common stock (as determined in Note) at a 37.5% discount to the lowest closing bid price of the common stock for the 20 prior
trading days including the day upon which a notice of conversion is received by the Company. In connection with the issuance of
the Note, the Company recorded a premium of $23,100 as the Note is considered stock settled debt under ASC 480, which was fully
accreted upon note inception. As of December 31, 2017, the outstanding principal and interest on the note was $38,660.
On
December 20, 2017, the Company entered into a Securities Purchase Agreement (“SPA”) with a lender, providing for the
purchase of a Convertible Redeemable Notes in the aggregate principal amount of $52,000 (“Note”). The Note was funded
on December 22, 2017, with the Company receiving $47,500 of net proceeds (net of OID and legal fees). The Note bear an interest
rate of 12% and are due and payable on December 20, 2018. The Note may be converted by the lender at any time into shares of Company’s
common stock at a price equal to 62.5% of the lowest closing bid price of the common stock for the 15 prior trading days including
the day upon which a notice of conversion is received by the Company. In connection with the issuance of the Note, the Company
recorded a premium of $31,200 as the Note is considered stock settled debt under ASC 480, which was fully accreted upon note inception.
As of December 31, 2017, the outstanding principal and interest on the note was $52,173.
Other
Financings
On
July 9, 2012, the Company issued a Secured Promissory Note (the “H&K Note”) in the principal amount of $849,510
to Holland & Knight LLP (“Holland & Knight”), its external legal counsel, in support of amounts due and owing
to Holland & Knight as of June 30, 2012. The H&K Note is non-interest bearing, and principal on the H&K Note is due
and payable as soon as practicably possible by the Company. The Company has agreed to remit payment against the H&K Note immediately
upon each occurrence of any of the following events: (a) completion of an acquisition or disposition of any of the Company’s
assets or stock or any of the Company’s subsidiaries’ assets or stock with gross proceeds in excess of $750,000, (b)
completion of any financing with gross proceeds in excess of $1,500,000, (c) receipt of any revenue in excess of $750,000 from
the licensing or development of any of the Company’s or the Company’s subsidiaries’ products, or (d) any liquidation
or reorganization of the Company’s assets or liabilities. The amount of payment to be remitted by the Company shall equal
one-third of the gross proceeds received by the Company upon each occurrence of any of the above events, until the principal is
repaid in full. If the Company receives $3,000,000 in gross proceeds in any one financing or licensing arrangement, the entire
principal balance shall be paid in full. The H&K Note was secured by substantially all of the Company’s assets pursuant
to a security agreement between the Company and Holland & Knight dated July 9, 2012. In conjunction with the TCA Purchase
Agreement and the Boeing License Agreement, Holland & Knight agreed to terminate its security interest. As of December 31,
2017, the Company had repaid $598,301 of the H&K Note and the outstanding balance was $252,209 which is included in notes
payable on the consolidated balance sheet.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
On November 1, 2015, the Company issued a convertible note (the “Note”) to a consultant, in the
principal amount of $62,500 with maturity date of November 1, 2017 and bears an interest of 10% per annum, pursuant to a consulting
agreement. In connection with the issuance of Note, the Company recorded a debt discount of $62,500, related to the embedded conversion
option derivative liability. During 2016, the outstanding principal and interest on Note was converted into 103 shares of common
stock. As the note conversion includes a “lesser of” pricing provision, a derivative liability of $76,987 was recorded
when the Note was entered into. The derivative liability is re-measured at each balance sheet date and reclassified to equity on
a pro-rata basis upon conversion of the note. As of December 31, 2016, the note had no outstanding balance and the derivative liability
recorded was reclassified to equity upon conversion.
On
March 16, 2016, the Company entered into a factoring agreement with a lender for $105,000 to fund working capital. The Company
also paid $3,150 of origination fees. The agreement requires daily repayments of $862 for an eight-month term, with the total
amount repaid of $144,900. As of September 30, 2016, the Company has repaid the outstanding principal and interest balance of
this note. On June 7, 2016, the Company entered into a second factoring agreement with a lender for $51,000 to fund working capital.
The Company also paid $1,020 of origination fees. The agreement requires daily repayments of $419 for an eight-month term, with
the total amount to be repaid $70,380. As of December 31, 2016, the Company has repaid the outstanding principal and interest
balance of this note. On September 9, 2016, the Company entered into a third factoring agreement with a lender for $105,000 to
fund working capital. The Company also paid $2,100 of origination fees. The agreement requires daily repayments of $862 for an
eight-month term, with the total amount to be repaid $144,900. As of March 31, 2017, the Company has repaid the outstanding principal
and interest balance of this note. On November 17, 2016, the Company entered into a fourth factoring agreement with a lender for
$100,000 to fund working capital. The Company also paid $2,000 of origination fees. The agreement requires daily repayments of
$821 for an eight-month term, with the total amount to be repaid $138,000. As of June 30, 2017, the Company has repaid the full
amount of the outstanding principal and interest balance of this note. On March 7, 2017, the Company entered into a fifth factoring
agreement with a lender for $105,000 to fund working capital. The Company also paid $2,100 of origination fees. The agreement
requires daily repayments of $1,034 for four and a half-month term, with the total amount to be repaid $144,900. As of September
30, 2017, the Company has repaid the full amount of the outstanding principal and interest balance of this note. On May 8, 2017,
the Company entered into a sixth factoring agreement with a lender for $120,000 to fund working capital. The Company also paid
$2,400 of origination fees. The agreement requires daily repayments of $1,250 for four and a half-month term, with the total amount
to be repaid $166,200. During the year ended December 31, 2017, the Company has repaid the full amount of the outstanding principal
and interest balance of this note.
On
May 2, 2016, the Company, through its wholly owned subsidiary, ENG entered into a revolving line of credit (the “Line”)
with California Bank of Commerce (“CBC”). The terms of the Line allow ENG to borrow against its accounts receivable
and inventory to manage its project based working capital requirements. The $350,000 Line has a maturity date of May 5, 2018 and
borrowings under the Line bear interest at the Wall Street Journal Prime Rate plus 1.5% (currently 5.0%). The Company has provided
a guaranty of the Line to CBC. The Line also contains certain representations, warranties, covenants and events of default, including
the requirement to maintain specified financial ratios. ENG currently meets all such ratios. Breaches of any of these terms could
limit ENG’s ability to borrow under the Line and result in increases in the interest rate under the Line. As of December
31, 2017, $350,000 was drawn under the Line.
During
the year ended December 31, 2016, the Company issued four separate convertible notes (the “Notes”) to a consultant,
three of the notes had the principal amount of $20,000 each and the fourth had a principal amount of $22,500, for an aggregate
principal amount of $82,500 with maturity dates between April 27, 2017 and August 27, 2017, pursuant to a consulting agreement.
The Notes bear interest at 8% per annum and are convertible at a 37.5% discount to lowest closing bid price in the 15 trading
days prior to conversion. In connection with the issuance of the Notes, the Company recorded a total premium of $49,500 as the
notes are considered stock settled debt under ASC 480, which was fully accreted as of December 31, 2016. During the year ended
December 31, 2016, $30,000 of the outstanding principal and interest on Notes were converted into 23,134 shares of common stock.
During the year ended December 31, 2017, $43,716 of the outstanding principal and interest on Notes were converted into 5,002,479
shares of common stock. As of December 31, 2017, the outstanding principal and interest of the Notes was $14,234.
On December 2015, the Company leased a specialized equipment under leases classified as capital leases. The
interest rate related to the lease obligation is 8.1% and is amortized over 4 years with the maturity date of November 30, 2019.
As of December 31, 2017, the outstanding principal and interest on the lease obligation was approximately $21,000, of which approximately
$13,000 is classified under notes payable and approximately $8,000 is classified under long-term loan payable on the consolidated
balance sheet.
On
December 2015 and August 2016, the Company issued two separate convertible notes (the “Notes”) in relation to the
acquisitions of Thermomedics and ENG. These Notes were amended in the beginning of 2017 and pursuant to the amended terms, are
no longer convertible notes. As of June 30, 2017, the remaining outstanding principal and interest balance of approximately $123,000
on one of the notes was paid in full, from the proceeds on sale of non-controlling interest (see Note 5). As of December 31, 2017,
the total outstanding principal and interest on the remaining note was $44,168 which is included in notes payable on the consolidated
balance sheet.
The
Company has approximately $3.6 million of debt which are past maturity and subject to conversion as of December 31, 2017.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
Embedded
Conversion Option Derivatives
Due
to the conversion terms of certain promissory notes, the embedded conversion options met the criteria to be bifurcated and presented
as derivative liabilities. The Company calculated the estimated fair values of the liabilities for embedded conversion option
derivative instruments at the original note inception dates using the Monte Carlo option pricing model using the share prices
of the Company’s stock on the dates of valuation and using the following ranges for volatility, expected term and the risk-free
interest rate at each respective valuation date, no dividend has been assumed for any of the periods:
|
|
|
|
December
31,
|
|
|
|
Note
Inception Date
|
|
2017
|
|
|
2016
|
|
Volatility
|
|
195
- 383
|
%
|
|
231
– 383
|
%
|
|
|
360
|
%
|
Expected
Term
|
|
0.4
- 1.50 years
|
|
|
0.17
– 1.41 years
|
|
|
|
0.01
- 1.34 years
|
|
Risk
Free Interest Rate
|
|
0.21
- 2.0
|
%
|
|
1.39
– 1.76
|
%
|
|
|
0.45
|
%
|
The following reflects the initial fair value on the note inception dates and changes in fair value of the
level 3 derivative through:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Balance, December 31
|
|
$
|
4,284,264
|
|
|
$
|
7,785,824
|
|
Note
inception date fair value allocated to debt discount
|
|
|
725,506
|
|
|
|
2,775,894
|
|
Note
inception date fair value allocated to other expense
|
|
|
71,396
|
|
|
|
984,889
|
|
Reclassification
of derivative liability to equity upon debt conversion
|
|
|
(2,622,961
|
)
|
|
|
(4,676,258
|
)
|
Change
in fair value
|
|
|
191,906
|
|
|
|
(2,586,085
|
)
|
Embedded
conversion option liability fair value
|
|
$
|
2,650,111
|
|
|
$
|
4,284,264
|
|
Fair
Value Measurements
We
currently measure and report at fair value the liability for embedded conversion option derivatives. The fair value liabilities
for price adjustable convertible debt instruments have been recorded as determined utilizing the Monte Carlo option pricing model
as previously discussed. The following tables summarize our financial assets and liabilities measured at fair value on a recurring
basis for the years ended December 31, 2017 and 2016:
|
|
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Balance
at December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of liability for embedded conversion option derivative instruments
|
|
$
|
4,284,264
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,284,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of liability for embedded conversion option derivative instruments
|
|
$
|
2,650,111
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,650,111
|
|
10.
Stockholders’ Deficit
Authorized
Common Stock and Reverse Stock Split
On
January 30, 2017, the Company filed the First Amendment to the Company’s Third Amended and Restated Certificate of Incorporation
with the State of Delaware, to increase the Company’s authorized capital stock from 3.9 billion shares to 20 billion shares
(19.995 billion common). The November 30, 2016 filing of the Third Amended and Restated Certificate of Incorporation changed the
par value of the Company’s Common Stock from $0.001 to $0.0001.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
On
May 19, 2017,
the Company filed the Second Amendment
to the Third Amended and Restated
Certificate of Incorporation, as amended,
with the State of Delaware,
to implement
a 1-for-3,000 reverse stock split of the Company’s outstanding
Common Stock
,
which became effective on May 23, 2017. The reverse stock split affected the outstanding
Common
Stock
as well as all Common Stock underlying convertible notes, warrants, convertible preferred stock and stock options
outstanding immediately prior to the reverse stock split. The number of authorized shares was not adjusted. All share and per
share amounts in the accompanying historical consolidated financial statements have been adjusted retroactively to reflect the
change in the par value of the
Common Stock
and the 1-for-3,000 reverse stock split.
On
December 27, 2017, the Company received (i) a written consent in lieu of a meeting of Stockholders (the “Written Consent”)
from holders of shares of voting securities representing approximately 78% of the total issued and outstanding shares of voting
stock of the Company; and (ii) a unanimous written consent of the Board to approve the following: the granting of discretionary
authority to the Board, at any time for a period of 12 months after the date of the Written Consent, to authorize the adoption
of an amendment to the Company’s Third Amended and Restated Certificate of Incorporation, as amended (the “Certificate
of Incorporation”), to effect a reverse stock split of the Company’s common stock at a ratio between 1 for 100 to
1 for 1,000, such ratio to be determined by the Board, or to determine not to proceed with the reverse stock split (the “Reverse
Stock Split”); and the granting of discretionary authority to the Board for a period of 12 months after the date of the
Written Consent, to authorize the adoption of an amendment to the Certificate of Incorporation to decrease the Company’s
authorized capital stock, from 20,000,000,000 shares down to an amount not less than 50,000,000 shares, such decrease to be determined
by the Board, or to determine not to proceed with the decrease in authorized capital stock (the “Decrease in Authorized
Shares”). As of the date of this filing, the Company had not effected the Reverse Stock Split or the Decrease in Authorized
Shares.
Conversion
of Convertible Notes
During
the year ended December 31, 2017 and 2016, approximately 357 million and 0.9 million shares were issued, respectively, in connection
with conversion of approximately $2.6 and $5.3 million of convertible promissory notes, respectively (see Note 9).
Restricted
Shares for Services
During
the year ended December 31, 2017, there were no shares of restricted stock issued to employees, consultants or advisors. During
the year ended December 31, 2016, the Company issued, outside of the approved employee stock incentive plans, an aggregate of
243 shares of restricted stock to consultants and advisors valued between $930 and $3,000 per share and recorded related stock-based
compensation of approximately $219,000 for the vested amounts.
Sale
of Non-Controlling Interest
During
the quarter ended June 30, 2017, the Company issued 1,300,000 shares of the Company’s common stock as a fee in relation
to the sale of a non- controlling interest (see Note 3) with grant date fair value of $78,000.
Series
I and Series II Preferred Stock
On
September 30, 2013, the Board of Directors authorized and in November 2013, the Company filed with the State of Delaware, a Certificate
of Designations of Preferences, Rights and Limitations of Series I Preferred Stock. The Series I Preferred Stock ranks junior
to the Company’s Series F Preferred Stock and to all liabilities of the Company and is senior to the Common Stock and any
other preferred stock. The Series I Preferred Stock has a stated value per share of $1,000, a dividend rate of 6% per annum, voting
rights on an as-converted basis and a conversion price equal to the closing bid price of the Company’s Common Stock on the
date of issuance. The Series I Preferred Stock is required to be redeemed (at stated value, plus any accrued dividends) by the
Company after three years or any time after one year, the Company may at its option, redeem the shares subject to a ten-day notice
(to allow holder conversion). The Series I Preferred Stock is convertible into the Company’s Common Stock, at stated value
plus accrued dividends, at the closing bid price on September 30, 2013, any time at the option of the holder and by the Company
in the event that the Company’s closing stock price exceeds 400% of the conversion price for twenty consecutive trading
days. The Company has classified the Series I Preferred Stock as a liability in the consolidated balance sheet due to the mandatory
redemption feature. The Series I Preferred Stock has voting rights equal to the number of shares of Common Stock that Series I
Preferred Stock is convertible into, times twenty-five. This provision gave the holders of Series I Preferred Stock voting control
in situations requiring shareholder vote.
On
November 5, 2013, the Company filed an Amended and Restated Certificate of Designation of Series I Preferred Stock (the “Amended
Certificate of Designation”). The Amended Certificate of Designation was filed to clarify and revise the mechanics of conversion
and certain conversion rights of the holders of Series I Preferred Stock. No other rights were modified or amended in the Amended
Certificate of Designation. On January 8, 2015, the Company filed an amendment to the Amended Certificate of Designation to increase
the authorized shares of Series I Convertible Preferred Stock from 1,000 shares to 2,500 shares. No other terms were modified
or amended in the Amended Certificate of Designation.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
On
July 25, 2016, the Board authorized a Certificate of Designations of Preferences, Rights and Limitations of Series II Convertible
Preferred Stock. The Certificate was filed with the State of Delaware Secretary of State on July 25, 2016. The Series II Preferred
ranks: (a) senior with respect to dividends and right of liquidation with the common stock; (b) pari passu with respect to dividends
and right of liquidation with the Company’s Series I Preferred and Series J Convertible Preferred Stock; and (c) junior
to all existing and future indebtedness of the Company. The Series II Preferred has a stated value per share of $1,000, subject
to adjustment as provided in the Certificate (the “Stated Value”), and a dividend rate of 6% per annum of the Stated
Value. As with the Series I Preferred, the Series II Preferred has 25 votes per common share equivalent. The Series II Preferred
is subject to redemption (at Stated Value, plus any accrued, but unpaid dividends (the “Liquidation Value”)) by the
Company no later than three years after a Deemed Liquidation Event and at the Company’s option after one year from the issuance
date of the Series II Preferred, subject to a ten-day notice (to allow holder conversion). The Series II Preferred is convertible
at the option of a holder or if the closing price of the common stock exceeds 400% of the Conversion Price for a period of twenty
consecutive trading days, at the option of the Company. Conversion Price means a price per share of the common stock equal to
100% of the lowest daily volume weighted average price of the common stock during the subsequent 12 months following the date
the Series II Preferred was issued.
From
September 30, 2013 through April 6, 2016, the Company issued 2,025 shares of Series I Preferred Stock to its officers, directors
and management for management and director compensation and payment of deferred obligations. Each of the Series I preferred is
convertible into the Company’s Common Stock, at stated value plus accrued dividends, at the closing bid price on the issuance
date, any time at the option of the holder and by the Company in the event that the Company’s closing stock price exceeds
400% of the conversion price for twenty consecutive trading days. The Series I Preferred Stock has voting rights equivalent to
twenty-five votes per common share equivalent.
On
August 11, 2016, the Board of PositiveID agreed to exchange 2,025 shares of its Series I Preferred, which have a stated value
of $2,025,000 and redemption value of $2,261,800, for 2,262 shares of Series II Preferred, which have a stated value of $2,262,000.
Pursuant to the Exchange each existing holder of Series I Preferred exchanged their Series I Preferred shares for Series II Preferred
shares having equivalent per share stated value, maintaining the same voting rights as they had as holders of the Series I Preferred.
The Series II have an aggregate stated value equivalent to the redemption value of the Series I at the exchange date. Both the
Series I Preferred and the Series II Preferred have a stated value per share of $1,000, and a dividend rate of 6% per annum. All
shares of Series I Preferred previously issued have become null and void and any and all rights arising thereunder have been extinguished.
The Series II Preferred is only forfeitable after the exchange date up to January 1, 2019 upon termination for cause and is subject
to acceleration in the event of conversion, redemption and certain events.
Accounting
guidance under ASC 718 dictates that the incremental difference in fair value of Series II and Series I should be recorded as
stock-based compensation expense. As a result of the independent valuation performed, we have recorded the Series II at the fair
value of $2,306,345 at the date of issuance. The Series I had a fair value of $281,345, resulting in a charge of $2,025,000 recorded
as stock-based compensation in 2016. Additionally, the Series I liability was reclassified to additional paid-in-capital.
On
March 29, 2017, the Company, filed a Certificate of Elimination (the “Certificate of Elimination”) for its Series
I Convertible Preferred Stock (“Series I”) with the Delaware Secretary of State to eliminate from its Third Amended
and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), all references to the
Company’s Series I. No shares of the Series I were issued or outstanding upon filing of the Certificate of Elimination.
On
March 29, 2017, the Company filed an Amended Restated Certificate of Designations of Preferences, Rights and Limitations of Series
II Convertible Preferred Stock (the “Amended Certificate of Designation”). The Amended Certificate of Designation
was filed to increase the authorized shares of Series II Convertible Preferred Stock from 3,000 shares to 4,000 shares. No other
terms were modified or amended in the Amended Certificate of Designation.
On
March 29, 2017, the Company
issued
shares of Series II Preferred as follows: (i)
50 shares of Series II Preferred were issued to each of three independent board members as a component of their 2017 compensation
(150 shares total); and (ii) 685 shares of Series II Preferred were issued to the Company’s management as a component of
their 2016 incentive compensation at a stated value of $1,000 per share. These Series II Preferred shares are only forfeitable
up to January 1, 2019 upon termination for cause and is subject to acceleration in the event of conversion, redemption and certain
events. In connection with the issuance of the 835 Series II Preferred shares, the Company charged $841,594 to stock based compensation
expense in 2017 (which is $10,000 less than the total cost as $10,000 was accrued in fiscal 2016) to reflect the Series II Preferred
fair value of $1,020 per share. As of December 31, 2017, 3,097 shares of Series II were issued and outstanding.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
Series
J Preferred Stock
On
December 4, 2015, the Board of Directors authorized and on December 7, 2015, the Company filed with the State of Delaware, a Certificate
of Designations of Preferences, Rights and Limitations of Series J Preferred Stock where 1,700 shares of Series J Preferred Stock
were authorized. The Series J Preferred Stock ranks; (a) senior with respect to dividends and right of liquidation with the Company’s
common stock (b) pari passu with respect to dividends and right of liquidation with the Company’s Series I Convertible Preferred
Stock; and (c) junior with respect to dividends and right of liquidation to all existing and future indebtedness of the Company.
Without the prior written consent of Holders holding a majority of the outstanding shares of Series J Preferred Stock, the Company
may not issue any Preferred Stock that is senior to the Series J Preferred Stock in right of dividends and liquidation. At any
time after the date of the issuance of shares of Series J Preferred Stock, the Corporation will have the right, at the Corporation’s
option, to redeem all or any portion of the shares of Series J Preferred Stock at a price per share equal to 100% of the $1,000
per share stated value of the shares being redeemed. Series J Preferred Stock is not entitled to dividends, interest and voting
rights. The Series J Preferred Stock is convertible into the Company’s common stock, at stated value, at a conversion price
equal to 100% of the arithmetic average of the VWAP of the common stock for the fifteen trading days prior to the six-month anniversary
of the Issuance Date.
On August 25, 2016, PositiveID completed the acquisition and entered into an agreement with Sanomedics and
Thermomedics (the “August Agreement”), which amends certain terms of the Purchase Agreement and terminates the Control
Agreement. As a result, the 125 shares of Preferred Series J stock originally issued shall be released from escrow as follows:
71 shares to Sanomedics and 54 shares returned to the Company’s treasury. As of December 31, 2017, there were 71 shares Series
J preferred stock which is convertible into 55,469 of the Company’s common shares at fixed conversion price of $1.28 (based
on Series J stated value of $1,000 per share) as determined by the agreement (see Note 2).
Warrants
From
time to time the Company issues warrants both for compensatory purposes to consultants and advisors, and to financial institutions
in conjunction with financing activities.
No
warrants were issued during the year ended December 31, 2017. As of December 31, 2017, 883 warrants to purchase the Company’s
common stock have been granted outside of the Company’s plans and remain outstanding as of December 31, 2017. These warrants
were granted at exercise prices in excess of $9.00 per share, are fully vested and are exercisable for a period of five years
from the date of grant.
On
January 28, 2016, pursuant to a financing agreement, the Company issued immediately exercisable warrants to purchase 8 shares
of common stock at an initial exercise price of $2,250 per share and are exercisable for a period of four years from the vest
date. The warrants expire in 2021.
On
November 1, 2016, pursuant to a consulting agreement with two advisors, the Company issued to each advisor, warrants to purchase
200 shares of common stock, which are immediately exercisable. The warrants have an initial exercise price of $9.0 per share and
are exercisable for a period of five years from the vest date. The warrants expire in 2021.
On
November 1, 2016, pursuant to a consulting agreement with an advisor, the Company issued warrants to purchase 400 shares of common
stock, which are immediately exercisable. The warrants have an initial exercise price of $9.0 per share and are exercisable for
a period of five years from the vest date. The warrants expire in 2021.
A summary of warrant activity for the years ended December 31, 2017 and 2016 is as follows:
|
|
Financing
|
|
|
Compensatory
|
|
|
Total
|
|
|
|
Number
of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
at January 1, 2016
|
|
|
13
|
|
|
$
|
12,000
|
|
|
|
77
|
|
|
$
|
7,500
|
|
|
|
90
|
|
|
$
|
8,220
|
|
Granted
|
|
|
8
|
|
|
|
2,250
|
|
|
|
827
|
|
|
|
120
|
|
|
|
835
|
|
|
|
120
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired/Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
(27
|
)
|
|
|
4,200
|
|
|
|
(27
|
)
|
|
|
4,200
|
|
Outstanding
at December 31, 2016
|
|
|
21
|
|
|
$
|
9,600
|
|
|
|
877
|
|
|
$
|
630
|
|
|
|
898
|
|
|
$
|
810
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired/Forfeited
|
|
|
(13
|
)
|
|
|
12,000
|
|
|
|
(2
|
)
|
|
|
112,500
|
|
|
|
(15
|
)
|
|
|
25,400
|
|
Outstanding
at December 31, 2017
|
|
|
8
|
|
|
$
|
2,250
|
|
|
|
875
|
|
|
$
|
428
|
|
|
|
883
|
|
|
$
|
444
|
|
Exercisable
at December 31, 2017
|
|
|
8
|
|
|
$
|
2,250
|
|
|
|
875
|
|
|
$
|
428
|
|
|
|
883
|
|
|
$
|
444
|
|
The
Company had 883 warrants issued and outstanding which are also exercisable as of December 31, 2017.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
Stock
Option Plans
On
August 26, 2011, the Company’s stockholders approved and adopted the PositiveID Corporation 2011 Stock Incentive Plan (the
“2011 Plan”). The 2011 Plan provides for awards of incentive stock options, nonqualified stock options, restricted
stock awards, performance units, performance shares, SARs and other stock-based awards to employees and consultants. Under the
2011 Plan, up to 1 million shares of common stock may be granted pursuant to awards. Approximately 1.0 million remaining shares
may be granted under the 2011 Plan. Awards to employees under the Company’s stock option plans generally vest over a two-year
period, with pro-rata vesting upon the anniversary of the grant. Awards of options have a maximum term of ten years and the Company
generally issues new shares upon exercise.
During
the year ended December 31, 2017, no options were issued under the 2011 plan or outside the plan. During the year ended December
31, 2016, the Company issued, outside of the approved employee stock incentive plans, a total of 1,043 options of which, 672 options
were issued to directors and employee and 371 options were issued to consultants. As of December 31, 2017, the Company had 1,203
stock options in total, outside the plan, issued and outstanding out if which 827 vested between 2014 to 2017 and 376 will vest
between 2018 and 2019. These options had a grant date fair value of approximately $1.4 million.
On
December 4, 2015, the Company’s Board of Directors approved and adopted the Thermomedics, Inc. 2015 Flexible Stock Plan
(“Thermomedics 2015 Plan”). The Thermomedics 2015 Plan provides for awards of incentive stock options, nonqualified
stock options, restricted stock awards, performance units, performance shares, SARs and other stock-based awards to employees
and consultants. Under the Thermomedics 2015 Plan, up to 5 million shares of common stock may be granted pursuant to awards. As
of December 31, 2017, 342,500 options were issued and outstanding under the Thermomedics 2015 plan. These options vested in 2017
and had a grant date fair value of $109,600 vested which were fully expensed as of the year ended December 31, 2017.
A
summary of option activity under the Company’s option plans and outside of the Company’s option plan for the years
ended December 31, 2017 and 2016 is as follows:
|
|
2017
|
|
|
2016
|
|
|
|
Number
of
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Number
of
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
Outstanding
on January 1
|
|
|
1,207
|
|
|
$
|
3,690
|
|
|
|
164
|
|
|
$
|
24,870
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
1,043
|
|
|
$
|
840
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
(4
|
)
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding
at year end
|
|
|
1,203
|
|
|
$
|
1,172
|
|
|
|
1,207
|
|
|
$
|
3,690
|
|
Exercisable
at year end
|
|
|
827
|
|
|
$
|
1,051
|
|
|
|
531
|
|
|
$
|
6,780
|
|
Shares
available for grant within Company’s option plans at year end
|
|
|
1,000,000
|
|
|
|
|
|
|
|
1,523,000
|
|
|
|
|
|
|
|
Outstanding
Stock Options
|
|
|
Exercisable
Stock Options
|
|
Range
of
Exercise
Prices
|
|
Shares
|
|
|
Weighted-
Average Remaining Contractual Life (years)
|
|
|
Weighted-
Average Exercise Price
|
|
|
Shares
|
|
|
Weighted-
Average Exercise Price
|
|
$9.00
to $4,500
|
|
|
1,201
|
|
|
|
3.5
|
|
|
$
|
1,158
|
|
|
|
825
|
|
|
$
|
1,032
|
|
above
$4,501
|
|
|
2
|
|
|
|
3.5
|
|
|
$
|
10,800
|
|
|
|
2
|
|
|
$
|
10,800
|
|
|
|
|
1,203
|
|
|
|
3.5
|
|
|
$
|
1,172
|
|
|
|
827
|
|
|
$
|
1,051
|
|
Vested
options
|
|
|
827
|
|
|
|
3.5
|
|
|
$
|
1,051
|
|
|
|
|
|
|
|
|
|
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 options at each option grant date were reasonable under the circumstances.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
The
Black-Scholes model, which the Company uses to determine compensation expense, requires the Company to make several key judgments
including:
|
●
|
the
value of the Company’s common stock;
|
|
●
|
the
expected life of issued stock options;
|
|
●
|
the
expected volatility of the Company’s stock price;
|
|
●
|
the
expected dividend yield to be realized over the life of the stock option; and
|
|
●
|
the
risk-free interest rate over the expected life of the stock options.
|
The
Company’s computation of the expected life of issued stock options was determined based on historical experience of similar
awards giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations about employees’
future length of service. The interest rate was based on the U.S. Treasury yield curve in effect at the time of grant. The computation
of volatility was based on the historical volatility of the Company’s common stock.
The
fair values of the options granted were estimated on the grant date using the Black-Scholes valuation model based on the following
weighted-average assumptions:
|
2016
|
|
Expected
dividend yield
|
—
|
|
Expected
stock price volatility
|
164
- 210
|
%
|
Risk-free
interest rate
|
1.03
– 1.93
|
%
|
Expected
term (in years)
|
5.0
|
|
Stock-Based
Compensation Expense
Stock-based
compensation expense for awards granted to employees is recognized on a straight-line basis over the requisite service period
based on the grant-date fair value. 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 compensation expense
related to stock options, restricted stock and preferred shares of approximately $1.1 million and $3.2 million for the years ended
December 31, 2017 and 2016, respectively. The intrinsic value for all options outstanding was approximately nil as of December
31, 2017 and 2016.
11.
Income Taxes
The
Company accounts for income taxes under the asset and liability approach. Deferred taxes are recorded based upon the tax impact
of items affecting financial reporting and tax filings in different periods. A valuation allowance is provided against net deferred
tax assets where the Company determines realization is not currently judged to be more likely than not.
The
tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities
consist of the following (in thousands):
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred
tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Accrued
expenses and reserves
|
|
$
|
1,182
|
|
|
$
|
575
|
|
Stock-based
compensation
|
|
|
1,166
|
|
|
|
2,473
|
|
Intangibles
|
|
|
8
|
|
|
|
(93
|
)
|
Property
and equipment
|
|
|
(10
|
)
|
|
|
(23
|
|
Net
operating loss carryforwards
|
|
|
24,328
|
|
|
|
34,064
|
|
Gross
deferred tax assets
|
|
|
26,674
|
|
|
|
36,996
|
|
Valuation
allowance
|
|
|
(26,674
|
)
|
|
|
(36,996
|
)
|
Net
deferred taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
As
a result of the Company’s history of incurring operating losses a full valuation allowance against the net deferred tax
asset has been recorded at December 31, 2017 and 2016.
On
December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (Act). The Act makes significant modifications to the provisions
of the Internal Revenue Code, including but not limited to, a corporate tax rate decrease to 21% effective as of January 1, 2018.
The Company’s net deferred tax assets and liabilities have been revalued at the newly enacted U.S. Corporate rate in the
year of enactment. The adjustment related to the revaluation of the deferred tax asset and liability balances, is a net charge
of approximately $12 million. This expense is fully offset by a change in valuation allowance. Accordingly, there is no impact
on income tax expense as of December 31, 2017.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
The difference between the effective rate reflected in the provision for income taxes on loss before taxes
and the amounts determined by applying the applicable statutory U.S. tax rate of 34% are analyzed below:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Statutory
tax benefit
|
|
%
|
(34
|
)
|
|
%
|
(34
|
)
|
State
income taxes, net of federal effects
|
|
|
—
|
|
|
|
(11
|
)
|
Permanent
items
|
|
|
3
|
|
|
|
—
|
|
Change in Federal Tax rate
|
|
|
141
|
|
|
|
33
|
|
Change
in deferred tax asset valuation allowance
|
|
|
(110
|
)
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
%
|
—
|
|
|
%
|
—
|
|
As of December 31, 2017, the Company had U.S. federal net operating loss carry forwards of approximately $91
million for income tax purposes that expire in various amounts through 2037. The Company also has approximately $73 million of
state net operating loss carryforwards that expire in various amounts through 2037.
Based
upon the change of ownership rules under IRC Section 382, the Company had a change of ownership in December 2007 exceeding the
50% limitation threshold imposed by IRC Section 382. The Company experienced subsequent changes in ownership during 2008 through
2016 as a result of the Company issuing common shares which could potentially result in additional changes of ownership under
IRC Section 382. As a result, the Company’s future utilization of its net operating loss carryforwards will be significantly
limited as to the amount of use in any particular year, and consequently may be subject to expiration.
The
Company files consolidated tax returns in the United States federal jurisdiction and in the various states in which it does business.
In general, the Company is no longer subject to U.S. federal or state income tax examinations for years before December 31, 2014.
In
July 2008, the Company completed the sale of all of the outstanding capital stock of Xmark to Stanley. In January 2010, Stanley
received a notice from the Canadian Revenue Agency (“CRA”) that the CRA would be performing a review of Xmark’s
Canadian tax returns for the periods 2005 through 2008. This review covers all periods that the Company owned Xmark. The review
performed by CRA resulted in an assessment of approximately $1.4 million, in 2011.
During
2012, the Company received an indemnification claim notice from Stanley related to the matter. The Company did not agree with
the position taken by the CRA, and filed a formal appeal related to the matter. In addition, Stanley received assessments for
withholding taxes on deemed dividend payments in respect of the disallowed management fee totaling approximately $0.2 million,
for which we filed a formal appeal. In connection with the filing of the appeals, Stanley was required to remit an upfront payment
of a portion of the tax reassessment totaling approximately $950,000. The Company has also filed a formal appeal related to the
withholding tax assessments, pursuant to which Stanley was required to remit an additional upfront payment of approximately $220,000.
The Company has agreed to repay Stanley for the upfront payments, plus interest and the upfront payments made by Stanley is reflected
as a liability on the accompanying consolidated balance sheet as “Tax Liability”
As
of December 31, 2017, the Company had paid a total amount of $704,061 of the liability. In addition, Stanley had received a total
refund of $148,325 from the CRA which was deducted from the recorded liability. Based on management’s estimate, including
reconciling to Stanley’s accounts, the Company has a recorded tax liability of approximately $100,000, as reflected as a
liability on the accompanying consolidated balance sheet as of December 31, 2017.
12.
Commitments and Contingencies
Lease
Commitments
The
Company leases certain office space under non-cancelable operating leases, including the Company’s corporate offices in
Delray Beach, Florida under a lease scheduled to expire in October 18, 2018, laboratory and office space in Pleasanton, California
a lease scheduled to expire in September 30, 2018 and office and manufacturing space in Concord, California which is currently
on a month-to-month commitment. Rent expense under operating leases totaled approximately $248,000 and $244,000 for the years
ended December 31, 2017 and 2016, respectively. Future minimum lease payments under operating leases at December 31, 2017 are
as follows (in thousands):
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
LG
Capital Funding Litigation
On
March 7, 2017, LG Capital Funding, LLC (“LG”), filed a complaint in the U.S. District Court of the
Eastern District of New York (the “Court”), related to a 10% Convertible Redeemable Note issued by us to LG on
July 7, 2016 in the amount of $66,150 (the “LG Note”). The LG Note provides that LG is entitled to convert all or
any amount of the outstanding balance and accrued interest of the LG Note into shares of our Common Stock. The complaint
alleges breach of contract and anticipatory breach of contract, asserting, among other things, that we failed to deliver
shares of stock to LG pursuant to a notice of conversion, and failed to reserve a sufficient number of shares of stock
issuable under the terms of the LG Note. On July 12, 2017, the Court denied LG’s motion for Order to Show Cause and
Request for an Injunction. The Company will continue to answer and defend against this complaint.
Under ASC 450,
the Company has determined that it is reasonably possible but not probable that the outcome of the litigation might be
unfavorable. Based on the Company’s analysis of the outcome of the litigation, the range of potential outcomes are
between $0 and $250,000. As such, the Company has recorded a loss contingency it believes reflects the most likely outcome of
the litigation.
Other
Legal Proceedings
The
Company is a party to certain legal actions, as either plaintiff or defendant, arising in the ordinary course of business, none
of which is expected to have a material adverse effect on the Company’s business, financial condition or results of operations.
However, litigation is inherently unpredictable, and the costs and other effects of pending or future litigation, governmental
investigations, legal and administrative cases and proceedings, whether civil or criminal, settlements, judgments and investigations,
claims or charges in any such matters, and developments or assertions by or against the Company relating to the Company or to
the Company’s intellectual property rights and intellectual property licenses could have a material adverse effect on the
Company’s business, financial condition and operating results.
13.
Employment Contracts and Stock Compensation
On
April 8, 2016, the Company entered into employment contracts with both Mr. Caragol and Mr. Probst, effective January 1, 2016.
The terms of Mr. Caragol’s employment contract include a three-year term and a salary of $275,000. Mr. Caragol’s salary
will automatically adjust to $350,000 at the time that PositiveID’s common stock is listed on a national exchange. Mr. Caragol
is eligible for annual bonuses and was granted 167 stock options and; (i) 57 vested on January 1, 2017; (ii) 55 vested on January
1, 2018; and (iii) 55 will vest on January 1, 2019. These options will expire on January 1, 2021. Mr. Caragol is also entitled
to the use of a Company car and related expenses and an unaccountable expense allowance of $25,000. The terms of Mr. Probst’s
employment contract include a three-year term and a salary of $200,000. Mr. Probst’s salary will automatically adjust to
$250,000 at the time that PositiveID’s common stock is listed on a national exchange. Mr. Probst is eligible for annual
bonuses and was granted 100 stock options and; (i) 34 vested on January 1, 2017; (ii) 33 vested on January 1, 2018; and (iii)
33 will vest on January 1, 2019. These options will expire on January 1, 2021.
If
either Mr. Caragol or Mr. Probst’s employment is terminated prior to the expiration of the term of his employment agreement,
certain significant payments become due. The amount of such payments depends on the nature of the termination. In addition, the
employment agreement contains a change of control provision that provides for the payment of 2.0 times and 2.95 times in the case
of Mr. Probst and Mr. Caragol, respectively of the then current base salary and the same multipliers of the highest bonus paid
to the executive during the three calendar years immediately prior to the change of control. Any outstanding stock options or
restricted shares held by the executive as of the date of his termination or a change of control become vested and exercisable
as of such date and remain exercisable during the remaining life of the option. The employment agreement also contains non-compete
and confidentiality provisions which are effective from the date of employment through two years from the date the employment
agreement is terminated.
14.
Segments
The
Company operates in three business segments: Molecular Diagnostics, Medical Devices, and Mobile Labs.
Molecular
Diagnostics
The
Company develops molecular diagnostic systems for rapid medical testing and bio-threat detection. The Company’s fully automated
pathogen detection systems are designed to detect a range of biological threats. The Company’s M-BAND (Microfluidic Bio-agent
Autonomous Networked Detector) system is an airborne bio-threat detection system developed for the homeland defense industry to
detect biological weapons of mass destruction. The Company is developing the FireflyDX family of products, automated point-of-need
pathogen detection systems for rapid diagnostics.
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
Medical
Devices
Through
its wholly-owned Thermomedics subsidiary, the Company markets and sells the Caregiver product. Caregiver is an FDA-cleared for
clinical use, infrared thermometer that measures forehead temperature in adults, children and infants, without contact. Caregiver
is the world’s first clinically validated, non-contact thermometer for the healthcare providers market, which includes hospitals,
physicians’ offices, medical clinics, nursing homes and other long-term care institutions, and acute care hospitals. Our
Caregiver thermometer with TouchFree™ technology is less likely to transmit infectious disease than devices that require
even minimal contact. It therefore saves medical facilities the cost of probe covers (up to $0.10 per temperature reading), storage
space and disposal costs.
Mobile
Labs
Our
ENG subsidiary (see Note 5) is a leader in the specialty technology vehicle market, with a focus on mobile laboratories, command
and communications applications, and mobile cellular systems. ENG builds mobile laboratories specifically designed for chemical
and biological detection, monitoring and analysis. ENG also provides specialty vehicle manufacturing for TV news vans and trucks,
emergency response trailers, mobile command centers, infrared inspection, utilities inspection, and other special purpose vehicles.
The
following is the selected segment data for the years ended December 31, 2017 and 2016 (in thousands):
|
|
Year ended December 31, 2017
|
|
|
|
Molecular
Diagnostics
|
|
|
Medical
Devices
|
|
|
Mobile
Labs
|
|
|
Corporate
|
|
|
Total
|
|
Revenue
|
|
$
|
142
|
|
|
$
|
411
|
|
|
$
|
4,806
|
|
|
$
|
—
|
|
|
$
|
5,359
|
|
Operating (loss)
|
|
$
|
(739
|
)
|
|
$
|
(338
|
)
|
|
$
|
(747
|
)
|
|
$
|
(3,021
|
)
|
|
$
|
(4,845
|
)
|
Depreciation and amortization
|
|
$
|
(8
|
)
|
|
$
|
(109
|
)
|
|
$
|
(85
|
)
|
|
$
|
(1
|
)
|
|
$
|
(203
|
)
|
Interest and other income (expense)
|
|
$
|
34
|
|
|
$
|
(3
|
)
|
|
$
|
(4
|
)
|
|
$
|
(3,915
|
)
|
|
$
|
(3,888
|
)
|
Net loss
|
|
$
|
(705
|
)
|
|
$
|
(341
|
)
|
|
$
|
(753
|
)
|
|
$
|
(6,934
|
)
|
|
$
|
(8,733
|
)
|
Goodwill
|
|
$
|
510
|
|
|
$
|
91
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
601
|
|
Segmented assets
|
|
$
|
543
|
|
|
$
|
382
|
|
|
$
|
700
|
|
|
$
|
100
|
|
|
$
|
1,725
|
|
Expenditures for property and equipment
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(41
|
)
|
|
$
|
—
|
|
|
$
|
(41
|
)
|
|
|
Year
ended December 31, 2016
|
|
|
|
Molecular
Diagnostics
|
|
|
Medical
Devices
|
|
|
Mobile
Labs
|
|
|
Corporate
|
|
|
Total
|
|
Revenue
|
|
$
|
115
|
|
|
$
|
417
|
|
|
$
|
5,027
|
|
|
$
|
—
|
|
|
$
|
5,559
|
|
Operating
(loss)
|
|
$
|
(828
|
)
|
|
$
|
(462
|
)
|
|
$
|
(257
|
)
|
|
$
|
(5,600
|
)
|
|
$
|
(7,147
|
)
|
Depreciation
and amortization
|
|
$
|
(111
|
)
|
|
$
|
(109
|
)
|
|
$
|
(79
|
)
|
|
$
|
(1
|
)
|
|
$
|
(300
|
)
|
Interest
and other income (expense)
|
|
$
|
22
|
|
|
$
|
(60
|
)
|
|
$
|
(3
|
)
|
|
$
|
(5,873
|
)
|
|
$
|
(5,914
|
)
|
Net
loss
|
|
$
|
(806
|
)
|
|
$
|
(522
|
)
|
|
$
|
(260
|
)
|
|
$
|
(11,473
|
)
|
|
$
|
(13,061
|
)
|
Goodwill
|
|
$
|
510
|
|
|
$
|
91
|
|
|
$
|
199
|
|
|
$
|
—
|
|
|
$
|
800
|
|
Segmented
assets
|
|
$
|
606
|
|
|
$
|
514
|
|
|
$
|
1,349
|
|
|
$
|
93
|
|
|
$
|
2,562
|
|
Expenditures
for property and equipment
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
(7
|
)
|
|
$
|
—
|
|
|
$
|
(8
|
)
|
POSITIVEID
CORPORATION AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
15.
Subsequent events
On
January 30, 2018, ENG entered into a Stock Purchase Agreement (“SPA II”) with the Purchaser, pursuant to which
(i) ENG sold six hundred forty one (641) shares (the “Shares”) of Series A Convertible Preferred Stock of ENG for
a purchase price of approximately $312 per share, for an aggregate purchase price of $200,000; and (ii) the Company declined
to exercise its right to purchase a pro rata portion of the Shares and has approved the issuance and sale of the Shares by
ENG to the Purchaser, and waived all rights it may have with respect to ENG’s purchase of the Shares. In connection
with the transaction, the Company also committed to issue a promissory note in the amount of $54,000 to ENG for settlement of
past and current intercompany transactions and liabilities. As a result of this transaction the Company’s equity
interest in ENG has decreased to 24% and prospectively the Company will deconsolidate the balance sheet, results of
operations and cash flows of ENG in its consolidated financial statements. At December 31, 2017 the Company owned 50.2%
of ENG and controlled ENG’s assets. These assets represented between 50% and 55% of the Company’s overall assets.
As the result of the Company owning 24% of ENG as of January 30, 2018 and no longer controlling ENG’s assets,
the Company will not consolidate the results of ENG, comprising a significant amount of the Company’s assets, as of
January 30, 2018 (see Note 5).
The
Company, subsequent to year end
:
●
|
received approximately $771,500 of net proceeds
(net of legal fees and OID) from note payables
in
the aggregate principal amount of approximately $819,000. These notes payable have; (i) interest rates between 8%
to 12%; (ii) conversion discounts between 35% to 37.5% and; (iii) maturity dates between nine to twelve months from the date
it was funded. In connection with the issuance of these notes, the Company will record a premium as these notes are considered
stock settled debt under ASC 480.
|
|
|
●
|
received
$24,000 of net proceeds from back end notes
(see Note 9).
|
|
|
●
|
issued
4.9 billion shares of common stock for the conversion of notes with a principal value of approximately $1.0 million.
|