S-1/A 1 psid20140114_s1a.htm FORM S-1/A psid20130912_s1.htm

 

As filed with the Securities and Exchange Commission on January 21, 2014

 

Registration Statement No. 333-192965

 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

AMENDMENT NO. 1 TO  

FORM S-1

 

REGISTRATION STATEMENT UNDER

THE SECURITIES ACT OF 1933

 

POSITIVEID CORPORATION

(Exact name of registrant in its charter)

 

Delaware

3669

06-1637809

(State or other jurisdiction of

(Primary Standard Industrial

(IRS Employer

incorporation or organization)

Classification Code Number)

Identification Number)

 

1690 South Congress Avenue, Suite 201

Delray Beach, Florida 33445

(561) 805-8000

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

 

William J. Caragol

Chief Executive Officer

PositiveID Corporation

1690 South Congress Avenue, Suite 201

Delray Beach, Florida 33445

(561) 805-8000

(Name, address, including zip code, and telephone number,

including area code, of agent for service)

 

Copies of communications to:
Gregg E. Jaclin, Esq.
Szaferman, Lakind, Blumstein & Blader, PC

101 Grovers Mills Road, #200

Lawrenceville, NJ 08648

Tel. No.: (609) 275-0400
Fax No.: (609) 275-4511

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

  

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

 

Large accelerated filer  

Accelerated filer

Non-accelerated filer  

Smaller reporting company

(Do not check if a smaller reporting company)

 

 

 

 

 
 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered

 

Amount

to be

Registered(1)

   

Proposed

Maximum

Offering

Price Per

Share(2)

   

Proposed

Maximum

Aggregate

Offering

Price

   

Amount of

Registration

Fee (3)

 

Common Stock, par value $0.01 per share, issuable pursuant to the conversion of Series F Preferred Stock

    9,000,000     $ 0.025     $ 225,000     $  40.92  

Total

    9,000,000     $ 0.025     $ 225,000     $ 40.92  

 

 

(1)

Pursuant to Rule 416 under the Securities Act of 1933, as amended, this registration statement shall be deemed to cover the additional securities (i) to be offered or issued in connection with any provision of any securities purported to be registered hereby to be offered pursuant to terms which provide for a change in the amount of securities being offered or issued to prevent dilution resulting from stock splits, stock dividends or similar transactions and (ii) of the same class as the securities covered by this registration statement issued or issuable prior to completion of the distribution of the securities covered by this registration statement as a result of a split of, or a stock dividend on, the registered securities.

 

 

(2)

Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) of the Securities Act of 1933, as amended, based on the average of the high and low prices of the common stock of the registrant as reported on the OTC Markets on January 14, 2014.   

     
  (3) Previously paid.

 

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.

 

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the U.S. Securities and Exchange Commission (“SEC”) is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

 
 

 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JANUARY 21, 2014

 

PRELIMINARY PROSPECTUS

 

 

9,000,000 Shares of Common Stock

 

 

POSITIVEID CORPORATION

 

 

This Prospectus relates to the resale of up to 9,000,000 shares of common stock of PositiveID Corporation (the “Company”), par value $0.01 per share (the “Common Stock”), consisting of 9,000,000 shares of Common Stock issuable to Ironridge Global IV, Ltd., a British Virgin Islands business company (“Ironridge”), upon conversion of up to 750 shares of Series F Preferred Stock (“Series F”) held by Ironridge pursuant to a stock purchase agreement, dated August 26, 2013, between Ironridge and the Company (the “Ironridge Agreement”), or that we may choose to issue in lieu of cash as payment of the 7.65% dividends on the Series F. The Company will not receive any proceeds from the resale of these shares of common stock. The total amount of shares of common stock which may be sold pursuant to this Prospectus would constitute approximately 15.3% of our issued and outstanding common stock as of January 14, 2014, assuming that the selling stockholder will sell all of the shares offered for sale.    

 

The selling stockholder may offer all or part of the shares for resale from time to time through public or private transactions, at either prevailing market prices or at privately negotiated prices

 

Our common stock is quoted on the OTC Markets, under the ticker symbol “PSID.” On January 14, 2014, the closing price of our common stock was $0.025 per share.

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 4 to read about factors you should consider before investing in shares of our common stock.

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

 

 

 

 

 

 

 

 

 

The Date of This Prospectus Is:  _____________, 2014

 

 
 

 

TABLE OF CONTENTS

 

Page

Prospectus Summary

1

 

 

The Offering

4

 

 

Risk Factors

5

 

 

Special Note Regarding Forward-Looking Statements

13

 

 

Use of Proceeds

15

 

 

Dilution

15

 

 

Selling Stockholder

16

 

 

Market for Common Equity and Related Stockholder Matters

18

 

 

Description of Business

18

 

 

Description of Property

28

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

 

 

Directors, Executive Officers and Corporate Governance

36

 

 

Executive Compensation

38

 

 

Security Ownership of Certain Beneficial Owners and Management

43

 

 

Certain Relationships and Related Transactions, and Director Independence

44
   

Plan of Distribution

47

 

 

Description of Securities to be Registered

48

 

 

Shares Eligible for Future Sale

53

 

 

Legal Matters

54

 

 

Experts

54

 

 

Where You Can Find More Information

54

 

 

Index To Consolidated Financial Statements

F-1

 

 
 

 

 PROSPECTUS SUMMARY

 

This summary highlights selected information contained elsewhere in this Prospectus. This summary does not contain all the information that you should consider before investing in the common stock of PositiveID Corporation (referred to herein as “we,” “our,” “us,” “PositiveID” or the “Company”). You should carefully read the entire Prospectus, including “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the accompanying financial statements and the related notes to the Financial Statements before making an investment decision.

 

Business Overview

 

PositiveID, through its wholly owned subsidiary MicroFluidic Systems (“MFS”) (collectively, the “Company” or “PositiveID”), develops molecular diagnostic systems for bio-threat detection, for rapid diagnostic testing, and assays 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.  MFS is also developing automated pathogen detection systems (Firefly Dx and Dragonfly) for rapid diagnostics, both for point of need and clinical applications.

 

Since its inception, and prior to our acquisition of MFS in May 2011, MFS had received over $50 million in government grants and contract work for the Department of Defense, Department of Homeland Security (“DHS”), the Federal Bureau of Investigation, the National Aeronautics and Space Administration, the Defense Advanced Research Projects Agency and industrial clients.  MFS holds a substantial portfolio of key patents/patents pending primarily for the automation of biological detection using real-time analysis for the rapid, reliable and specific identification of pathogens.

 

Beginning in 2011 and continuing into the first quarter of 2013, as a part of our refocusing our business, we set out to (1) align ourselves with strong strategic partners to prepare our M-BAND product for the DHS’s BioWatch Generation 3, Phase II program, which has been estimated to be a $3.1 billion program over five years; (2) identify a research and development contract to complete the development of our clinical/point of demand diagnostic platform, the Firefly Dx and Dragonfly systems; and (3) reduce our operating costs to focus solely on those initiatives.

 

Subsequent to acquiring MFS, the Company has: (1) sold substantially all of the assets of NationalCreditReport.com, which it had acquired in connection with the Steel Vault Merger in 2011; (2) sold its VeriChip and HealthLink businesses in 2012; (3) drastically reduced its operating cost and cash burn; (4) entered into a license agreement and teaming agreement with The Boeing Company (“Boeing”) for its M-BAND system in the fourth quarter of 2012; and (5) executed into an exclusive license for its iglucose technology in February, 2013.  The Company will continue to either seek strategic partners or acquirers for its GlucoChip and its glucose breath detection system.

 

Series I Designation

 

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

 

Subject to the Plan, $590,000 of accrued compensation was settled through the commitment to transfer 327,778 shares of VeriTeQ common stock (out of the 1,199,532 total shares of VeriTeQ common stock that were issuable to the Company upon the conversion of VeriTeQ’s Series C convertible preferred stock owned by the Company). The Series C conversion was completed on October 22, 2013. The VeriTeQ shares were valued at $1.80 (adjusted to reflect the 1 for 30 reverse split by VeriTeQ on October 22, 2013), which was a 21% discount to the closing bid price on September 30, 2013, to reflect liquidity discount and holding period restrictions. The closing bid price on the day of the conversion was $2.28; on January 14, 2014 the closing bid price was $0.88. The value of the VeriTeq shares transferred was $747,334 on the day of the conversion and was $288,445 as of January 14, 2014.

 

Subject to the Plan, 413 shares of Series I Preferred Stock were issued in settlement of $413,000 of accrued compensation. The Series I preferred shares were issued to six members of the Company’s Management, including all four members of the current board of directors. There are a total of 9,805,556 shares issuable to Management upon conversion of these shares of Series I Preferred Stock as of January 14, 2013.

 

On December 31, 2013 the three independent directors were each granted 25 shares of Series I, as a component of their 2014 board compensation. On January 14, 2014 an additional 512 shares of Series I were issued to the Company’s CEO, President and Senior Vice President. Of these shares 381 were issued to the Company’s chief executive officer as follows: (i) 138 shares issued for 2013 incentive compensation, (ii) 143 shares were issued for his agreement to amend his employment contract and reduce his annual salary from the remainder of the term of the contract to $200,000, per annum, and (iii) 100 shares of Series I as a tax equalization payment to compensate Mr. Caragol for taxes paid on unrealized stock compensation during past years. All Series I shares granted vest on January 1, 2016.

 

The Series I Preferred Stock has voting rights equivalent to twenty five votes per common share equivalent. As a result, the Company’s officers and directors increased their voting control from 7.2% to 95%, as of January 14, 2014. William J. Caragol, our Chief Executive officer and Chairman of the board of Directors has been issued 631 shares granting him majority control with 60.4% voting control as of January 14, 2014, up from 5.6% as of September 30, 2013.

 

As of January 14, 2014, our officers, directors and management now have an aggregate of 893.0 million votes on any matter brought to a vote of the holders of common stock, including an aggregate 889.4 million votes, or 95% of the total vote, through the ownership of Series I Preferred Stock, and 3.6 million votes through the ownership of shares of our common stock. As a result, our officers, directors, and management have voting control over the 939.2 million of the outstanding voting shares of the Company. There exists an inherent conflict of interest in the board approval of the issuance of Series I Preferred Stock to officers and directors of the Company, which granted themselves voting control over the Company.

 

In granting these shares to directors and management the Board considered a number of factors, including the current market rates at which financing is available to early stage companies. It has been the Company’s experience that debt and equity financing for the Company in current market conditions was typically being priced at total discounts to market well in excess of 50%. The Board and management did not wish to receive any discount for the conversion of over $413,000 of liabilities, but did seek to have a voting preference that was commensurate with the risk and more importantly continued commitment of the Board and management to the Company. The shares were therefore issued at the closing bid price the day of exchange (subject to signed exchange agreements with each participant), and at a dollar for dollar exchange ($1,000 of liability settled for 1 preferred share).     

 

 
1

 

 

In granting these shares to directors and management the Board considered a number of factors, including the current market rates at which financing is available to early stage companies. It has been the Company’s experience that debt and equity financing for the Company in current market conditions was typically being priced at total discounts to market well in excess of 50%. The Board and management did not wish to receive any discount for the conversion of over $413,000 of liabilities, but did seek to have a voting preference that was commensurate with the risk and more importantly continued commitment of the Board and management to the Company. The shares were therefore issued at the closing bid price the day of exchange (subject to signed exchange agreements with each participant), and at a dollar for dollar exchange ($1,000 of liability settled for 1 preferred share).     

 

Sale of VeriTeQ Securities

 

During October 2013, VeriTeQ arranged a financing with a group of eight buyers (the “Buyers”). In conjunction with that transaction, the Buyers offered the Company a choice of either selling its interest in VeriTeQ, including 871,754 shares and its convertible promissory note (which had a balance of $203,694 at the time of the transaction), which was convertible into 135,793 shares of VeriTeQ stock, for $750,000, or alternatively, to lock up its shares for a period of one year. The Board of Directors of the Company considered a number of factors, including the Company’s liquidity and access to capital, and the prospects for return on the VeriTeQ shares in twelve months. The Board concluded that it was in the best interest of Company to sell its interest in VeriTeQ to the Buyers.

 

As a result, on November 8, 2013 the Company entered into a letter agreement (the “November Letter Agreement”) with VeriTeQ and on November 13, 2013, the Company entered into a Stock Purchase Agreement (“SPA”) with the Buyers. On November 13, 2013 VeriTeQ entered into a financing transaction with Hudson Bay Master Fund Ltd. (“Hudson”) and other participants, including most of the Buyers.

 

Pursuant to the SPA, the Company sold its remaining shares of VeriTeQ common stock (871,754) and the convertible note owed from VeriTeQ to the Company (convertible into 135,793 shares of VeriTeQ common stock). Total proceeds from the sale were $750,000, which were received by November 18, 2013. On November 13, 2013, the aggregate market value of the 871,754 shares of VeriTeQ common stock was $1.8 million, and the aggregate market value of 135,793 shares of Common Stock underlying the promissory note was $276,000. As of January 14, 2014 the VeriTeQ shares and shares underlying the note (1,007,547 shares) had a value of $886,641. No officers or directors that received shares of VeriTeQ common stock on September 30, 2013 sold shares to any of the Buyers.

 

Pursuant to the November Letter Agreement, VeriTeQ is required to deliver to the Company a warrant to purchase 300,000 shares of VeriTeQ common stock at price of $2.84. The warrant will have the same terms as the warrant being entered into between Hudson and VeriTeQ, including a term of 5 years and customary pricing reset provisions. The November Letter Agreement also specified that the remaining outstanding payable balance owed from VeriTeQ to the Company would be repaid pursuant to the following schedule: (a) $100,000 paid upon VeriTeQ raising capital in excess of $3 million (excluding the November 18, 2013 financing with Hudson), (b) within 30 and 60 days after the initial $100,000 payment, VeriTeQ shall pay $50,000 each (total of and additional $100,000) to the Company, and (c) the remaining balance of the payable (approximately $12,000) will be paid within 90 days after the initial $100,000 payment. The Letter Agreement also included several administrative corrections to previous agreements between the Company and VeriTeQ.     

 

Stock Purchase Agreement with Ironridge

 

On August 26, 2013, the Company entered into a Stock Purchase Agreement (the “Ironridge Stock Purchase Agreement”) and a Registration Rights Agreement (the “Ironridge Registration Rights Agreement” and, collectively, the “Ironridge Agreements”) with Ironridge Global IV, Ltd., a British Virgin Islands business company (“Ironridge”). Pursuant to the Ironridge Agreements, the Company agreed to issue 450 shares of Series F Preferred Stock (“Series F”) to Ironridge in exchange for $300,000. Additionally, the Company issued 100 shares and 50 shares of Series F as commitment and documentation fees, respectively.

 

Beginning in July 2011, the Company entered into a series of financings with Ironridge involving the Company’s Series F convertible preferred stock. Since July 2011 a total of 2,850 Series F shares have been issued and 2,100 have been converted into common shares, all of which were converted at the Company’s option. No Series F shares have been redeemed and no Series F shares have been converted at the option of Ironridge. There are currently 750 shares of Series F outstanding.

 

The table below provides a detail of the 2,850 Series F shares issued:      

 

 

  Series F Shares 

Converted 

  Date   Type of Consideration

Amount of  

Consideration

    500    

August 15, 2011

 

Cash

  $ 500,000    
    130    

September 20, 2011

 

Cash

    1    
    290    

November 14, 2011

 

Cash

    193,000    
    290    

November 14, 2011

 

Cash

    243,000    
    290    

December 5, 2011

 

Cash

    188,000    
    500    

July 12, 2012

 

Commitment Fee

    0    
    100    

September 12, 2012

 

Waiver Fee

    0    
    450    

August 26, 2013

 

Cash

    300,000    
    150    

August 26, 2013

 

Commitment and documentation fees

    0    
    150    

January 10, 2014

 

Penalty shares

    0    
    2,850             $ 1,424,001    

 

 
2

 

 

The table below provides a detail of the 2,100 Series F which have been converted by the Company:

 

 

Series F Shares

Converted

 

Date of Conversion

Notice

 

Number of Shares

Issued on Conversion

 
    300    

February 15, 2012

    189,082    
    200    

March 21, 2012

    151,162    
    130    

April 2, 2012

    117,507    
    210    

June 14, 2012

    553,225    
    134    

July 10, 2012

    501,681    
    250    

September 12, 2012

    1,339,981    
    100    

November 27, 2012

    506,254    
    176    

January 7, 2013

    724,090    
    100    

January 30, 2013

    395,690    
    100    

March 4, 2013

    477,828    
    100    

April 19, 2013

    655,993    
    50    

May 16, 2013

    522,140    
    50    

May 17, 2013

    522,245    
    50    

June 21, 2013

    937,230    
    50    

July 11, 2013

    1,357,646    
    50    

September 24, 2013

    3,582,620    
    50    

November 12, 2013

    3,486,101    
    2,100           16,020,475    

 

The initial 1,500 shares of Series F were issued to Ironridge in 2011. At the time of the preferred stock transaction the Company had sold 272,479 shares of common stock to Ironridge, for which it took as partial compensation, a note for $2.25 million. The original terms of the Series F were designed contemplating that the Company would desire to convert the Series F shares, as the terms of the note required accelerated principal and interest payments in the event of Series F conversions. As a result, Ironridge repaid the note, plus accrued interest, after the conversion of the first 1,500 Series F shares. The parties never contemplated that Ironridge would ever convert Series F shares and, in fact, they never did. The issuances of Series F that followed the original 1,500 were all entered into with the agreement that the Company would issue a Company conversion notice when requested by Ironridge, which it did for the 600 Series F that were converted after the original 1,500. Ironridge has always been, and continues to be, the only holder of Series F. After entering into the August 26, 2013 Ironridge Stock Purchase Agreement, the parties agreed to amend the Certificate of Designations of Preferences, Rights and Limitations of Series F Preferred Stock to reflect the original and continued intention of the parties, as discussed below.

 

On December 18, 2013, the Company entered into a letter agreement (“Letter Agreement”) with Ironridge. Pursuant to the Letter Agreement, the Company and Ironridge amended Section 2(d) of the Ironridge Registration Rights Agreement, dated August 26, 2013. Pursuant to that letter agreement the Company has now paid Ironridge 150 shares Series F Preferred Stock as a penalty as the registration statement under the Ironridge Registration Rights Agreement was not effective by January 10, 2014. If the Registration Statement is not effective by January 24, 2014, then an additional 150 shares Series F Preferred Stock is owed. The Letter Agreement also documents that the Company and Ironridge have agreed to amend and restate the Certificate of Designations of Preferences, Rights and Limitations of Series F Preferred Stock.

 

On December 19, 2013, the Company, in accordance with Section 151(g) of the Delaware General Corporation Law, filed an Amended and Restated Certificate of Designation of Series F Preferred Stock (the “Amended Certificate of Designation”). The Amended Certificate of Designation was filed to clarify and revise the mechanics of conversion of the Series F Preferred Stock. The Amended Certificate of Designation now makes the Company and Series F conversion formula the same. No other rights were modified or amended in the Amended Certificate of Designation.

 

Had the Company not amended the Series F Certificate of Designation and had Ironridge exercised their option to convert 600 shares of Series F stock on August 26, 2013, they would have received 1.2 million shares in the conversion, versus the 23.4 million common shares owed pursuant to a Company conversion. Had the Company not amended the Series F Certificate of Designation and had Ironridge exercised their option to convert 750 shares of Series F stock on January 14, 2014 they would have received 1.5 million shares in the conversion, versus the 61.5 million common shares owed pursuant to a Company conversion.  

 

 
3

 

 

The Series F earns a dividend of 7.65% and is redeemable by the Company after seven years. The Series F has a liquidation value of $1,000 per share, plus accrued dividends, and is convertible at the option of Ironridge or the Company into shares of the Company’s common stock at a discount, and we may choose to issue shares of common stock in lieu of cash as payment of dividends on the Series F. The Company has the option to buy back any shares of Series F at the liquidation value plus accrued dividends, without any premium. The Company has also agreed to file a Registration Statement covering the common shares underlying the Series F within 30 days of closing and to use its best efforts to get the Registration Statement effective. Such Registration Statement covers the resale of shares upon conversion of the Series F preferred stock at the option of Ironridge and by the Company. If the 750 shares of Series F Preferred stock were converted at the closing bid price ($0.025) on January 14, 2014, the number of common shares issued would be 61.5 million, whether converted by Ironridge or by the Company.  Total common shares that were issuable upon conversion of the 750 shares of Series F (based on the $300,000 proceeds received) as of the date of closing (August 29, 2013) and as of January 14, 2014 were 29.2 million and 61.5 million, which is the equivalent of a $0.010 per share conversion price ($292,000 total value) and a $0.005 per share conversion price ($307,500 total value), respectively. The conversion price of the Series F Preferred Stock and number of shares of common stock issuable upon conversation are the same whether converted by the Company or by Ironridge .

 

On April 18, 2013, our stockholders approved a reverse stock split within a range of between 1-for-10 to 1-for-25.  On that same date our Board of Directors approved a reverse stock split in the ratio of 1-for-25 and we filed a Certificate of Amendment to our Second Amended and Restated Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware to affect the reverse stock split.  On April 23, 2013, the reverse stock split became effective.  All share amounts in this Prospectus have been adjusted to reflect the 1-for 25 reverse stock split.

 

Where You Can Find Us

 

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 “we,” “our,” “us,” “PositiveID” or the “Company” in this Prospectus, we are referring to PositiveID Corporation and its consolidated subsidiaries.

 

THE OFFERING

 

Common stock offered by Selling Stockholder

9,000,000 shares of common stock, underlying up to 750 shares of Series F Preferred Stock

 

 

Common stock outstanding before the offering

49,798,831 shares of common stock as of the date hereof.

 

 

Common stock outstanding after the offering

58,798,831 shares of common stock.

 

 

Use of proceeds

We will not receive any proceeds from the sale of the shares of our common stock offered under this prospectus by the selling security holders. Rather, the selling security holder will receive those proceeds directly.  

 

 

OTC Markets Trading Symbol

PSID

 

 

Risk Factors

The common stock offered hereby involves a high degree of risk and should not be purchased by investors who cannot afford the loss of their entire investment. See “Risk Factors”.

 

 
4

 

 

RISK FACTORS

 

You should carefully consider the risks described below together with all of the other information included in this Prospectus before making an investment decision with regard to our securities. The statements contained in or incorporated into this Prospectus that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, 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, 2011 and 2012, we experienced net losses of $16.5 million and $8.0 million, respectively, for the nine months ended September 30, 2012 and 2013, we experienced losses of $6.6 million and $4.2 million, respectively, for the three months ended September 30, 2012 and 2013, we experienced net losses of $2.3 million and $0.8 million, respectively and our accumulated deficit at September 30, 2013 was $122.5 million.  We reported no revenue or gross profit from continuing operations for the year ended December 31, 2012 or the nine months ended September 30, 2013. Until one or more of the products under development is successfully brought to market, we do not anticipate generating significant revenue or gross profit.  Further, our subsidiary, MFS, reported no revenue or gross profit during the period from the date of acquisition of May 23, 2011 through September 30, 2013 as it had no active contracts during this period.  MFS has submitted, or is the process of submitting, bids on various potential new U.S. Government contracts; however, there can be no assurance that we will be successful in obtaining any such new or other contracts.

 

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

 

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

 

Our unaudited financial statements for the three and nine months ended September 30, 2013 and annual audited financial statements for the years ended December 31, 2012 indicate conditions exist that raise substantial doubt as to whether we will continue as a going concern. Our continuation as a going concern is dependent upon our ability to obtain financing to fund the continued development of products, including the operations of MFS, 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.

 

 
5

 

 

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. In particular, the, BioWatch Generation 3 program, is a very large program, under which we intend to bid as a subcontractor to The Boeing Company. Our success in this process is a very 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 FCC, FDA, other federal, state and local regulatory agencies and legislative bodies. Adverse decisions or new or amended regulations or mandates adopted by any of these regulatory or legislative bodies could negatively impact our operations by, among other things, causing unexpected or changed capital investments, lost revenues, increased costs of doing business, and could limit our ability to engage in certain sales or marketing activities.

 

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

 

Our future success depends, in part, on certain key employees, including William J. Caragol, our chairman of the board of directors and chief executive officer and Lyle Probst, president of MFS, 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 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.

 

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 January 14, 2014, our current directors and executive officers beneficially owned, in the aggregate, approximately 41.0% of our outstanding voting securities, including 33.5% owned by our chairman of the board  of directors 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 of directors 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.

 

On September 30, 2013, the Company issued 413 shares of Series I Preferred Stock to its current officers, directors and management (a total of six people) on December 31, 2013 and January 14, 2014, an additional 587 shares of Series I was issued for 2013 and 2014 management and director compensation. 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.

 

 
6

 

 

The Series I preferred shares issued to all four current members of the board of directors and management, as follows:

  

  

Name

 

Position

 

Preferred

Series I Issued

 

 

Common Shares Issuable Upon Conversion

 

 

Total

Votes

 

William J. Caragol

 

Chairman and Chief Executive Officer

 

 

631

 

 

 

22,616,469

 

 

 

565,411,735

 

Michael E. Krawitz

 

Director

 

 

76

 

 

 

2,443,653

 

 

 

61,091,324

 

Jeffrey S. Cobb

 

Director

 

 

63

 

 

 

2,076,250

 

 

 

51,906,240

 

Ned L. Siegel

 

Director

 

 

39

 

 

 

1,397,967

 

 

 

34,949,163

 

Lyle Probst

 

President, MFS

   

140

     

5,212,104

     

130,302,612

 

Allison F. Tomek

 

SVP of Corporate Development

   

51

     

1,830,542

     

45,763,551

 

Total

 

 

1,000

 

 

 

35,576,985

 

 

 

889,424,625

 

 

As of January 14, 2014, our officers, directors and management now have an aggregate of 893.0 million votes on any matter brought to a vote of the holders of our common stock, including an aggregate 889.4 million votes, or 95% of the total vote, through the ownership of Series I Preferred Stock, and 3.6 million votes through the ownership of shares of our common stock. As a result, our officers, directors, and management have voting control over the 939.2 million of the outstanding voting shares of the Company.

 

As a result, our Board of Directors 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. Now that 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 any future 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 our sales and marketing infrastructure and manufacturing operations; the degree of success we experience in  potential  monetizing the in vivo glucose-sensing RFID microchip and  the breath glucose detection system; 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.

 

We and our development partner Receptors are in the early stages of developing an in vivo glucose-sensing RFID microchip, the effectiveness of which is unproven.

 

We and our development partner, Receptors, have been engaged in the research and development of applying Receptors’ patented AFFINITY by DESIGNTM CARATM platform to the research and development of an in vivo glucose-sensing RFID microchip. That development program is currently dormant, the effectiveness of this sensor/microchip system is yet to be determined. As a result, there can be no assurance that we and Receptors will be able to successfully employ this development-stage product as a diagnostic solution for the detection of glucose in vivo. Any failure to establish the efficacy or safety of this development-stage product could have an adverse effect on our efforts to monetize the in vivo glucose-sensing RFID microchip.

 

 
7

 

 

Our efforts to monetize the in vivo glucose-sensing RFID microchip, and breath glucose detection system may not be successful.

 

These products are in the early stages of development, and are therefore prone to the risks of failure inherent in diagnostic product development. We or Receptors may be required to complete and undertake significant clinical trials to demonstrate to the FDA that these products are safe and effective to the satisfaction of the FDA and other non-United States regulatory authorities for their respective, intended uses, or are substantially equivalent in terms of safety and effectiveness to existing, lawfully-marketed, non-premarket approved devices. Clinical trials are expensive and uncertain processes that often take years to complete. Failure can occur at any stage of the process, and successful early positive results do not ensure that the entire clinical trial or later clinical trials will be successful. Product candidates in clinical-stage trials may fail to show desired efficacy and safety traits despite early promising results. If the research and development activities of us or Receptors do not result in commercially-viable products, our business, results of operations, financial condition, and stock price could be adversely affected.

 

Even if the FDA or similar non-United States regulatory authorities grant us regulatory approval of a product, the approval may take longer than we anticipate and may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for costly post-marketing follow up studies. Moreover, if we fail to comply with applicable regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

 

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.

 

Risks Occasioned by the Xmark Transaction

 

We may be liable for pre-closing period tax obligations of Xmark.

 

In January 2010, Stanley, who purchased Xmark from us, received a notice from the Canadian Revenue Agency, or the 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 we owned Xmark. In February 2011, and as revised on November 9, 2011, Stanley received a notice from the CRA that the CRA completed its review of the Xmark returns and was questioning certain deductions on the tax returns under review. In November and December 2011, the CRA and the Ministry of Revenue of the Province of Ontario issued notices of reassessment confirming the proposed adjustments. The total amount of the income tax reassessments for the 2006-2008 tax years, including both provincial and federal reassessments, plus interest, was approximately $1.4 million.  On January 20, 2012, we received an indemnification claim notice from Stanley related to the matter. We do not agree with the position taken by the CRA and filed a formal appeal related to the matter on March 8, 2012. In addition, on March 28, 2012, Stanley received assessments for withholding taxes on deemed dividend payments in respect of the disallowed management fees totaling approximately $0.2 million, for which we filed a formal appeal on June 7, 2012. In October 2012, the Company submitted a Competent Authority filing to the U.S. IRS seeking relief in the matter.  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. Pursuant to a letter agreement dated March 7, 2012, we have agreed to repay Stanley for the upfront payment, plus interest at the rate of five percent per annum, in 24 equal monthly payments beginning on June 1, 2012. To the extent that we and Stanley reach a successful resolution of the matter through the appeals process, the upfront payment (or a portion thereof) will be returned to Stanley or us as applicable. Based on our review of the correspondence and evaluation of the supporting detail, we believe that we have adequately accrued for this dispute. However, there can be no assurance that the ultimate resolution of this dispute will not have a material negative impact on our historical tax liabilities or results of operations.

 

Industry and Business Risks Related to Our Healthcare Businesses

 

We may never fully monetize our legacy healthcare products or systems.

 

Through September 30, 2013, substantially all of our healthcare products were under development and had generated only nominal revenue. We have sold or licensed two of these four products and will continue to seek to monetize the other two. We may not be successful in fully monetizing these legacy products.

 

 
8

 

 

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 our implantable GlucoChip, 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 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 our VeriChip business, VeriTeQ agreed to indemnify us for any liabilities relating to our implantable microchip. If VeriTeQ is unable to fulfill indemnity obligations, we would 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 capital stock may cause our stock price to fall, including the resale of shares by the Ironridge Entities pursuant to financing agreements.

 

The market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market, or the perception that these sales could occur. These sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate. As of January 14, 2014, we had 49,798,831 shares of common stock outstanding and we had warrants to purchase 3,085,620 shares of common stock and options to purchase 1,376,099 shares of common stock outstanding. All of the shares of common stock issuable upon exercise of our outstanding warrants and any vested options will be freely tradable without restriction under the federal securities laws unless sold by our affiliates.    

 

On July 28, 2011, we sold 272,479 shares of our common stock to Ironridge Global Technology under the common stock purchase agreement between us and Ironridge Global Technology dated July 27, 2011. We also sold to Ironridge Global III, LLC, or Ironridge Global, 1,500 shares of our Series F Preferred Stock under the preferred stock purchase agreement dated July 27, 2011.  On July 12, 2012, we issued an additional 500 shares of Series F Preferred Stock to Ironridge Technology Co. (a division of Ironridge Global IV, Ltd.) or Ironridge (and together with Ironridge Global Technology and Ironridge Global, the “Ironridge Entities”), under the purchase agreement between us and Ironridge dated July 12, 2012. The Series F Preferred Stock was issued in satisfaction of any obligation of the Company to issue the success fee shares as provided for in the securities purchase agreement entered into between the Company and Ironridge dated January 13, 2012, which terminated on April 26, 2012 by its terms.  On September 12, 2012, the Company entered into a purchase agreement with Ironridge pursuant to which the Company issued 100 shares of Series F Preferred Stock to Ironridge as a waiver to satisfy any penalties resulting from the Company’s late delivery of shares under a conversion of Series F Preferred Stock by Ironridge.  On August 26, 2013, we issued Ironridge 600 shares of Series F Preferred Stock pursuant to the Ironridge Stock Purchase Agreement. On January 10, 2014, we issued 150 shares of Series F Preferred Stock as penalty pursuant to the Letter Agreement dated December 18, 2013. Through January 14, 2014, the Ironridge Entities had converted 2,100 shares of Series F Preferred Stock into 16,020,475 shares of our common stock. As of January 14, 2014, there were 750 shares of Series F Preferred Stock outstanding, all of which are held by Ironridge Entities.

 

While shares of our common stock may be issuable to the Ironridge Entities upon conversion of the Series F Preferred Stock, no more sales can be made under our previous equity lines with the Ironridge Entities.

 

The shares of common stock the Ironridge Entities may receive under these agreements may be freely tradable under Rule 144 or future registration statements filed by us and they may promptly sell the shares we issue to them in the public markets. Such sales, and the potential for such sales, could cause the market price of our shares to decline significantly.

 

 
9

 

 

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 475,000,000 shares of capital stock consisting of 470,000,000 shares of common stock and 5,000,000 shares of preferred stock with preferences and rights to be determined by our Board of Directors. As of January 14, 2014, there are 49,798,831 shares of our common stock, 750 shares of our Series F preferred stock, and 1,000 of our Series I preferred stock outstanding. There are 1,376,099 shares of our common stock reserved for issuance pursuant to stock option agreements. We also have 3,085,620 shares of our common stock issuable upon the exercise of outstanding warrants. We also have convertible notes with principal and accrued interest balances of $135,946 as of January 14, 2014. These notes and our Series F and Series I preferred stock are convertible into common stock in the future at prices determined at the time of conversion. The Series F, Series I and convertible notes would convert into shares of common stock, based on the closing price of $0.025 on January 14, 2014, as follows:

 

   

Principal/

   

Common Share Conversion

 
   

Liquidation

   

At Current

   

At 25%

   

At 50%

   

At 75%

 
   

Value

   

Market

   

Discount

   

Discount

   

Discount

 
                                         

Series F

  $ 772,472       61,478,357       81,971,142       122,956,713       245,913,426 (1)

Series I

    1,007,369       35,576,985       35,576,985       35,576,985       35,576,985 (2)

Convertible Notes

    135,946       9,206,619       12,275,492       18,413,238       36,826,476 (3)

Equity Line

    -       -       -       -       - (4)

Settlement Agreement

    -       -       -       -       - (5)
                                         
    $ 1,915,787       106,261,961       129,823,619       176,946,936       318,316,887  
 
 

(1)

Represents the liquidation value, including accrued dividends, on 750 shares of Series F, converted at the closing price of $0.025 on January 14, 2014 and at discounts of 25%, 50% and 75% from the closing price on January 14, 2014.

 

(2)

Represents liquidation value, including accrued dividends, on (i) 413 shares of Series I, converted at $0.036; (ii) 75 shares of Series I converted at $0.0250; (ii) 512 shares of Series I converted at $0.0245, which are fix conversion prices.

 

(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 39% to 42%. This table includes common shares conversions at the closing price of $0.024 on January 14, 2014, and at discounts of 25%, 50% and 75% from the closing price on January 14, 2014.

  (4) As of January 14, 2014, the Company had issued all of the 4.5 million shares that had been previously registered on Form S-1 for the Company’s equity line with IBC. The Company received $333,802 in proceeds, net of fees, from the issuances. The Company has no current intention of registering any further shares under this agreement.
  (5) In June 2013 the Company entered into a settlement agreement with IBC, settling a claim of $214,535, through the issuance of 3,637,681 shares. As of January 14, 2014 the obligation had been settled in full.

 

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 of Directors 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.

 

In July 2008 we declared, and in August 2008 we paid, a special cash dividend of $15.8 million on our capital stock. Any future determination with respect to the payment of dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, general business conditions, terms of financing arrangements and other factors that our Board of Directors may deem relevant. In addition, our Certificates of Designation for shares of Series C, Series F, Series H and Series I Preferred Stock prohibit the payment of cash dividends on our common stock while any such shares of preferred stock are outstanding.

 

 
10

 

 

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

 

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

 

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

 

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

 

 

success or lack of success in being awarded, as a subcontractor to The Boeing Company, the Stage 1 BioWatch Generation 3, Phase II contract;

 

 

success or lack of success in being awarded research and development contracts with U.S. Government agencies;

 

 

success or lack of success being granted patents for its core biological diagnostic and detection technologies;

 

 

success or lack of success of monetizing the GlucoChip development partnership between us and Receptors;

 

 

success or lack of success in monetizing the breath glucose detection system;

 

 

introduction of competitive products into the market;

 

 

a finding that the in vivo glucose-sensing RFID microchip and the breath glucose detection system infringes the patents of a third party;

 

 

our ability to obtain patents on the breath glucose detection system;

 

 

receipt of payments of any royalty payments under licensing agreements;

 

 

unfavorable publicity regarding us or our products;

 

 

termination of development efforts for the GlucoChip, which is the in vivo glucose-sensing RFID microchip, or the breath glucose detection system;

 

 

timing of expenses we may incur with respect to any license or acquisition of products or technologies; and

  

 

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.

 

 
11

 

 

Our financing transactions with Optimus may be deemed to be in violation of Section 5 of the Securities Act, and as a result security holders that purchased shares from Optimus may have the right to rescind their purchase of such securities.

 

Under the terms of the Preferred Stock Purchase Agreements with Optimus, we were able to sell convertible preferred shares, from time to time in one or more tranches, to Optimus.  We believe the sale of the convertible preferred stock to Optimus was made in compliance with Rule 506 of Regulation D.  From time to time and at our sole discretion, we could present Optimus with a notice to purchase such convertible preferred shares. Optimus was obligated to purchase such convertible preferred shares on the twentieth trading day after the notice date, subject to satisfaction of certain closing conditions.  R & R Consulting Partners, LLC, a company controlled by Scott R. Silverman, our former chairman and chief executive officer, Mr. Silverman, and William J. Caragol, our then chief financial officer, loaned shares of common stock they personally owned to Optimus.  We were advised by Optimus that Optimus would then sell the borrowed shares into the market and use the proceeds from the sale of such shares to fund the purchase of the preferred stock under the Preferred Stock Purchase Agreements. On or after the six month anniversary of the issuance date, the preferred stock could be converted by us into shares of our common stock and the lending stockholders could simultaneously demand return of the borrowed shares from Optimus.  Optimus was able to use the shares it received upon conversion of the convertible preferred shares to replace the borrowed shares.

 

If the resale of the borrowed shares by Optimus is not deemed to be a valid secondary offering by Optimus, and is deemed to be an unregistered offering by us with Optimus acting as an underwriter in violation of Section 5 of the Securities Act stockholders who purchased these securities would have a number of remedies available to them, including the right to rescind the purchase of those securities.

 

We do not believe that the Optimus transaction violated Section 5 since the transaction consisting of the loan of the shares was registered on the registration statements on Form S-3 (File No. 333-157696) and (File No. 333-168085), initially filed with the SEC on March 4, 2009 and July 13, 2010, respectively, and declared effective by the SEC on March 12, 2009 and July 22, 2010, respectively.  The lending stockholders loaned the borrowed shares to Optimus.  Then, Optimus was added as a new selling stockholder to the registration statements by prospectus supplements under Rule 424(b) of the Securities Act dated September 29, 2009 and March 14, 2011, respectively.

 

Since Optimus acquired the shares from the lending stockholders, who were previously named in the registration statements, and there was no change in the aggregate number of securities or dollar amount registered, we believe Optimus was properly added as a selling stockholder.  As a result, we believe that the resale of the borrowed shares by Optimus was properly registered and was not a violation of Section 5.

 

Additionally, we believe that the statute of limitations period applicable to potential claims for rescission under the Securities Act is one year commencing on the date of violation of the federal registration requirements. We believe that the one year federal statute of limitations on sales of shares of our common stock has expired for sales made under the 2009 Optimus transaction, and we believe the federal statute of limitations on sales of shares of common stock expired in 2012 for sales made under the March 2011 Optimus transaction. Statutes of limitations under state laws vary by state, with the limitation time period under many state statutes not typically beginning until the facts giving rise to a violation are known. Our disclosure in this Prospectus is not an admission that we did not comply with any federal and state registration or disclosure requirements nor is it a waiver by us of any applicable statute of limitations or any potential defense we may have.  If we are required to pay security holders who could opt to rescind their purchase of such securities, it would have a material adverse effect on our financial condition and results of operations. We are not presently able to accurately determine an estimated amount for any potential rescission liability associated with the resale of the loaned shares by Optimus in the event that the transaction were to be found to violate Section 5 of the Securities Act as we do not have knowledge of the amount and timing of such resales, nor information regarding the state or states in which such resales may have occurred.  We know that Optimus sold all of the 248,000 loaned shares it received.  We believe that the range of prices at which Optimus sold the loaned shares was between $12.50-$80.50 per share related to the 2009 Optimus transactions and between $2.75-$15.75 per share related to the 2011 Optimus transaction. No adjustment has been made in our consolidated financial statements related to the outcome of this contingency.

 

We are registering an aggregate of 9,000,000 shares of common stock underlying the Series F Preferred Stock issued under the Ironridge Stock Purchase Agreement. The sales of such shares could depress the market price of our common stock.

 

We are registering an aggregate of 9,000,000 shares of common stock under this Prospectus, which Ironridge may obtain upon conversion of up to 750 shares of Series F Preferred Stock. The 9,000,000 shares would represent approximately 15.3% of our shares of common stock outstanding as of the date of this Prospectus. Ironridge is restricted from converting any Series F to the extent it would cause Ironridge to hold more than 9.99% of our total outstanding shares at any one time. The sale of these shares into the public market by Ironridge could depress the market price of 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 issued to Ironridge in this offering and upon conversion of the Series F Preferred Stock and Series H Preferred Stock. We may seek additional capital through one or more additional equity transactions in 2013; however, such transactions will be subject to market conditions and there can be no assurance any such transaction will be completed.

 

 
12

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Prospectus contains “forward-looking statements” that are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different than the results, performance or achievements expressed or implied by the forward-looking statements.

 

 

the expectation that operating losses will continue for the near future, and that until we are able to achieve profits, we intend to continue to seek to access the capital markets to fund the development of our products;

 

 

that we seek to structure our research and development on a project basis to allow management of costs and results on a discrete short term project basis, the expectation that doing so may result in quarterly expenses that rise and fall depending on the underlying project status, and the expectation that this method of managing projects may allow us to minimize our firm fixed commitments at any given point in time;

 

 

that based on our review of the correspondence and evaluation of the supporting detail involving the Canada Revenue Agency audit, we do not believe that the ultimate resolution of this dispute will have a material negative impact on our historical tax liabilities or results of operations;

 

 

that we intend to continue to explore strategic opportunities, including potential acquisition opportunities of businesses that are complementary to ours;

 

 

that we do not anticipate declaring any cash dividends on our common stock;

 

 

that our ability to continue as a going concern is dependent upon our ability to obtain financing to fund the continued development of our products and working capital requirements;

 

 

that we are well positioned to compete for BioWatch Generation 3, Phase II of the BioWatch Program and to take meaningful steps in the monetization of our legacy diabetes management products;

 

 

that M-BAND was developed in accordance with DHS guidelines;

 

 

that the full-roll out of the BioWatch Generation 3, Phase II is estimated at $3.1 billion;

 

 

that our current cash resources, our expected access to capital under the equity line financing arrangements, and, if necessary, delaying and/or reducing certain research, development and related activities and costs, that we will have sufficient funds available to meet our working capital requirements for the near-term future;

 

 

that our products have certain technological advantages, but maintaining these advantages will require continual investment in research and development, and later in sales and marketing;

 

 

that if any of our manufacturers or suppliers were to cease supplying us with system components, we would be able to procure alternative sources without material disruption to our business, and that we plan to continue to outsource any manufacturing requirements of our current and under development products;

  

 

that medical application of our Firefly Dx and Dragonfly products, our breath glucose detection device, and GlucoChip product will require FDA clearance;

 

 

that we will receive royalties in the amount of ten percent on all gross revenues arising out of or relating to VeriTeQ’s sale of products, whether by license or otherwise, specifically relating to the United States Patent No. 7,125,382, “Embedded Bio Sensor System”, and a royalty of twenty percent on gross revenues generated under the Development and Supply Agreement between us and Medcomp dated April 2, 2009;

 

 

that we anticipate  recognizing the entire $2.5 million fee under the Boeing License Agreement as revenue in accordance with applicable accounting literature and Securities and Exchange Commission guidance; and

 

 

that we will receive royalties related to our license of the iglucose™ technology to Smart Glucose Meter Corp (“SGMC”) for up to $2 million based on potential future revenues of glucose test strips sold by SGMC.

 

 

that sales of shares of our common stock offered in this Prospectus, or the perception that such sales could occur, may depress the market price of our common stock.

 

 
13

 

 

Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. Forward-looking statements can generally be identified by forward-looking words and phrases such as “anticipate,” “believe,” “could,” “potential,” “continues,” “estimate,” “seek,” “predict,” “designed,” “expect,” “intend,” “plan,” “may,” “should,” “will,” “would,” “project,” and other similar expressions that denote expectations of future or conditional events rather than statement of fact. Forward-looking statements also may relate to strategies, plans and objectives for, and potential results of, future operations, financial results, financial condition, business prospects, growth strategy and liquidity, and are based upon management’s current plans and beliefs or current estimates of future results or trends. Specifically, this Prospectus contains forward-looking statements regarding:

 

These forward-looking statements are based upon information currently available to us and are subject to a number of risks, uncertainties, and other factors that could cause our actual results, performance, prospects, or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Important factors that could cause our actual results to differ materially from the results referred to in the forward-looking statements include the following as well as the factors under “Risk Factors”:

 

 

our ability to predict the extent of future losses or when we will become profitable;

 

 

our ability to continue as a going concern;

 

 

our ability to successfully consider, review, and if appropriate, implement other strategic opportunities;

 

 

our expectation that we will incur losses, on a consolidated basis, for the foreseeable future;

 

 

our ability to fund our operations and continued development of our products, including M-BAND, Dragonfly and Firefly;

 

 

our ability to obtain and maximize the amount of capital that we will have available to pursue business opportunities;

 

 

our ability to successfully identify strategic partners or acquirers for the GlucoChip and the breath glucose detection system;

 

 

our ability to obtain patents on our products, the validity, scope and enforceability of our patents, and the protection afforded by our patents;

 

 

the potential for costly product liability claims and claims that our products infringe the intellectual property rights of others;

 

 

our ability to comply with current and future regulations relating to our businesses;

 

 

the potential for patent infringement claims to be brought against us asserting that we are violating another party’s intellectual property rights;

 

 

the potential for an unfavorable outcome relating to the Canadian tax audit;

 

 

our ability to be awarded government contracts;

 

 

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

  

 

our ability to receive royalties under the Asset Purchase Agreement with VeriTeQ;

 

 

our ability to receive payments from the Shared Services Agreement with VeriTeQ;

 

 

our ability to pay obligations when due which may result in an event of default under our financing arrangements;

 

 

our ability to drawdown on the equity line if the trading volume in our common stock declines.

   

Except as required by applicable law, we undertake no obligation to publicly revise any forward-looking statements, whether as a result of new information, future events or for any other reason. However, you should carefully review the risk factors set forth in other reports or documents we file from time to time with the SEC.

 

 
14

 

 

USE OF PROCEEDS

 

We will not receive any proceeds from the sale of the shares of our common stock offered under this prospectus by the selling security holders. Rather, the selling security holder will receive those proceeds directly.  

 

DILUTION

 

The following information is based upon the Company’s unaudited balance sheet as filed in the Company’s Quarterly Report on Form 10-Q as of September 30, 2013.

 

Dilution as used herein represents the difference between the offering price per share of shares offered hereby and the net tangible book value per share of the Company’s common stock after completion of the offering. Dilution in the offering is primarily due to the losses previously recognized by the Company.

 

The net tangible book value of the Company at September 30, 2013 was ($6,305,000) or ($0.19) per share. Net tangible book value represents the amount of total tangible assets less total liabilities. Assuming that all of the shares offered hereby were purchased by investors (a fact of which there can be no assurance) as of September 30, 2013, the then outstanding 32,915,000 shares of common stock, which would constitute all of the issued and outstanding equity capital of the Company, would have a net tangible book value ($6,005,000) or approximately ($0.14) per share.

 

We determine dilution by subtracting the adjusted net tangible book value per share after this offering from the public offering price per share of our common stock. The following items influence the dilution in net tangible book value per share to new investors:

 

Assuming 100% of the shares offered are sold:

 

Public offering price per unit

$0.025  

 

Net tangible book value per share as of September 30, 2013

$(0.19)

 

Increase per share attributable to sale of preferred stock to investors

$0.05

 

Net tangible book value (In thousands, except per share data):

 

   

09/30/2013

   

Offering

   

Post-offering

 
                         

Net tangible book value

  $ (6,305 )   $ 300     $ (6,005 )

Shares outstanding

    32,915       9,000       41,915  

Net tangible book value/share

  $ (0.19 )   $ 0.03     $ (0.14 )

Increase attributable to raise

                  $ 0.05  

Initial dilution to new shareholders

                  $ (0.18 )

 

Assuming 50% of the shares offered are sold:

 

Public offering price per unit

$0.025

 

Net tangible book value per share as of September 30, 2013

$(0.19)

 

Increase per share attributable to sale of common stock to investors

$0.03

 

 
15

 

 

Net tangible book value (In thousands, except per share data):

 

   

09/30/2013

   

Offering

   

Post-offering

 
                         

Net tangible book value

  $ (6,305 )   $ 300     $ (6,005 )

Shares outstanding

    32,915       4,500       37,415  

Net tangible book value/share

  $ (0.19 )   $ 0.07     $ (0.16 )

Increase attributable to raise

                  $ 0.03  

Initial dilution to new shareholders

                  $ (0.23 )

 

SELLING STOCKHOLDER

 

Ironridge is a selling security holder with respect to up to 9,000,000 shares of our common stock that are issuable to it upon conversion of up to 750 shares of Series F Preferred Stock that were issued to Ironridge under the terms of the Ironridge Stock Purchase Agreement.

 

The table below lists the following information with respect to Ironridge: (i) the number of outstanding shares of common stock beneficially owned by Ironridge prior to this offering; (ii) the number of shares of common stock offered by Ironridge in this offering; (iii) the number of shares of common stock to be beneficially owned Ironridge after the completion of this offering, assuming the sale of all of the shares of common stock offered by Ironridge; and (iv) the percentage of outstanding shares of common stock to be beneficially owned by the selling security holder after the completion of this offering, assuming the sale of all of the shares of common stock offered by Ironridge.

 

Information presented in the table below is from Ironridge, the reports furnished to us under rules of the SEC, and our stock ownership records.

 

The information regarding shares beneficially owned by Ironridge prior to the offering assumes that the shares of Series F Preferred Stock that may be converted into common stock by Ironridge under the Stock Purchase Agreement and that are included in this Prospectus are issued, but Ironridge may convert some, none or all of these shares and accordingly this information is provided only on this assumed basis.  The aggregate number of shares of our common stock in this offering constitutes approximately 18.1% of the outstanding shares of our common stock, based on 49,798,831 shares of common stock outstanding as of January 14, 2014.   

 

Ironridge may, from time to time, sell all, some or none of their shares in this offering. See “Plan of Distribution” below. No estimate can be given as to the number of shares that will be held by the selling security holders after completion of this offering, because the selling security holders may offer some or all of the shares, and, to our knowledge, there are currently no agreements, arrangements or understandings with respect to the sale of any of the shares. Ironridge is not a broker-dealer or affiliate of a broker-dealer. 

 

   

Shares

Beneficially

Owned

Prior to the

   

Number of

Shares

Offered

   

Shares

Beneficially

Owned

After

the Offering

 

Selling Security Holder

 

Offering

   

Hereby

   

Number

   

%

 
                                 

Ironridge Global IV, Ltd. (1)

    4,974,903 (2)     9,000,000 (2)     5,874,003       9.99% (2)

 

(1)

The address of the principal business office of Ironridge Global IV, Ltd.is Harbour House, 2nd Floor, Waterfront Drive, P.O. Box 972, Road Town, Tortola, British Virgin Islands VG1110. Voting and dispositive power with respect to the shares owned by Ironridge is exercised by David Sims, Director. However, for so long as Ironridge or any of their affiliates hold any shares of our common stock, they are prohibited from, among other actions: (1) voting any shares of our common stock owned or controlled by them, or soliciting any proxies or seeking to advise or influence any person with respect to any voting securities of the issuer; (2) engaging or participating in any actions or plans that relate to or would result in, among other things, (a) acquiring additional securities of us, alone or together with any other person, which would result in them collectively beneficially owning or controlling, or being deemed to beneficially own or control, more than 9.99% of our total outstanding common stock or other voting securities, (b) an extraordinary corporate transaction such as a merger, reorganization or liquidation, (c) a sale or transfer of a material amount of assets, (d) changes in our present board of directors or management, (e) material changes in our capitalization or dividend policy, (f) any other material change in our business or corporate structure, (g) actions which may impede the acquisition of control us by any person or entity, (h) causing a class of our securities to be delisted, (i) causing a class of our equity securities to become eligible for termination of registration; or (3) any actions similar to the foregoing.

 

 
16

 

 

Each of  Ironridge Global Partners, LLC (“IGP”) or its managing members, Brendan T. O’Neil, Richard H. Kreger, John C. Kirkland and Keith Coulston disclaims beneficial ownership or control of any of the securities covered by this statement.  IGP and Messrs. O’Neil, Kreger, Kirkland and Coulston directly own no shares of the issuer.  However, by reason of the provisions of Rule 13d-3 of the Exchange Act, as amended, IGP or Messrs. O’Neil, Kreger, Kirkland and Coulston may be deemed to beneficially own or control the shares owned by Irornidge and  Messrs. O’Neil, Kreger and Kirkland are each managing directors of Ironridg and managing directors, members and 30% beneficial owners of IGP.  Mr. Coulston is a director, member and 10% beneficial owner of IGP.  IGP is a stockholder and beneficial owner of Ironridge.  

  

(2)

The Series F Preferred Stock has a provision precluding the applicable Ironridge entity from converting any shares of Series F Preferred Stock if such conversion would result in Ironridge being deemed to beneficially own or control more than 9.99% of our outstanding common stock. The 9.99% ownership limitation does not prevent Ironridge from selling some of its holdings and then receiving additional shares.  In this way, Ironridge could sell more than the 9.99% ownership limitation while never holding more than this limit. Subject to the foregoing overall limitation, shares include (1) 9,000,000 shares, which is the number of shares of common stock that are being registered under this registration statement, which are issuable upon conversion of up to 750 shares of Series F Preferred Stock, or that we may choose to issue in lieu of cash as payment of the 7.65% dividends on the Series F Preferred Stock, (2) 4,974,903 shares of common stock beneficially owned by Ironridge,  (3) 61.5 million shares of common stock issuable upon conversion of the 750 remaining shares of the Series F Preferred Stock (at an assumed price of $0.025, at a 50% premium to that price the number of shares issuable would be 41.0 million; at discounts of 25%, 50% and 75% to the $0.025 price the number of shares would be 82.0 million, 123.0 million, and 245.9 million, respectively), and (4) a number of shares of common stock issuable upon conversion of any additional shares of Series F Preferred Stock that we may choose to issue in lieu of cash as payment of the 7.65% dividends on the Series F Preferred Stock. We may sell some, none or all of the shares of common stock to Ironridge in the event of any Series F Preferred Stock conversions. and Ironridge does not have the right to acquire or vote or have investment power with respect to any of these shares of common stock unless and until such shares are actually sold to Ironridge. Accordingly, Ironridge disclaims beneficial ownership of these shares.  

 

To our knowledge, the preceding table represents the holdings by Ironridge. Information concerning Ironridge may change from time to time, which changed information will be set forth in supplements to this prospectus if and when necessary. Because Ironridge may offer all or some of the common stock that it holds, we can only give an estimate as to the amount of common stock that will be held by the selling security holders upon the termination of this offering.  See “Plan of Distribution.”

 

 
17

 

 

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Our common stock is quoted on the OTC Markets under the symbol “PSID.” On January 14, 2014, the last reported bid price of our common stock was $0.025 per share.  The following table presents the high and low bid price for our common stock for the periods indicated:  

 

Fiscal Year Ended December 31, 2014

High

Low

Quarter ended March 31, 2014 (through January 14, 2014)

  $ 0.03     $ 0.02  

             

Fiscal Year Ended December 31, 2013

 

High

   

Low

 
Quarter ended December 31, 2013   $ 0.07     $ 0.02  

Quarter ended September 30, 2013

  $ 0.13     $ 0.03  

Quarter ended June 30, 2013

  $ 0.58     $ 0.13  

Quarter ended March 31, 2013

  $ 0.59     $ 0.37  

 

Fiscal Year Ended December 31, 2012

 

High

   

Low

 

Quarter ended December 31, 2012

  $ 0.75     $ 0.25  

Quarter ended September 30, 2012

  $ 1.00     $ 0.25  

Quarter ended June 30, 2012

  $ 2.75     $ 0.75  

Quarter ended March 31, 2012

  $ 4.75     $ 2.50  

 

Holders

 

As of January 14, 2014, there were approximately 92 holders of record of our common stock, which number does not reflect beneficial stockholders who hold their stock in nominee or “street” name through various brokerage firms.  

 

Dividend Policy

 

In July 2008, we declared and in August 2008, we paid a special cash dividend of $15.8 million on our capital stock. Any future determination with respect to the payment of dividends on our common stock will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, general business conditions, terms of financing arrangements and other factors that our Board of Directors may deem relevant.  In addition, our Certificates of Designation for shares of Series C, Series F, Series H and Series I Preferred Stock prohibit the payment of cash dividends on our common stock while any such shares of preferred stock are outstanding.  

 

DESCRIPTION OF BUSINESS

 

The Company

 

PositiveID, through its wholly-owned subsidiary MFS, develops molecular diagnostic systems for bio-threat detection and rapid medical testing.  The Company, through MFS, also develops fully automated pathogen detection systems and assays 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. MFS is also developing automated pathogen detection systems for rapid diagnostics, both for clinical and point of need applications.

 

PositiveID, formerly known as VeriChip Corporation, was formed as a Delaware corporation by Digital Angel Corporation, or Digital Angel, in November 2001. In January 2002, we began our efforts to create a market for radio frequency identification, or RFID, systems that utilize our 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, or 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, or 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.

 

 
18

 

 

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 November 12, 2008, we entered into an Asset Purchase Agreement, or APA, with Digital Angel Corporation and Destron Fearing Corporation, a wholly-owned subsidiary of Digital Angel Corporation, which collectively are referred to as, “Digital Angel.” The terms of the APA included our purchase of patents related to an embedded bio-sensor system for use in humans, and the assignment of any rights of Digital Angel under a development agreement associated with the development of an implantable glucose sensing microchip. We also received covenants from Digital Angel Corporation and Destron Fearing that permit the use of intellectual property of Digital Angel related to our health care business without payment of ongoing royalties, as well as inventory and a limited period of technology support by Digital Angel. We paid Digital Angel $500,000 at the closing of the APA.

 

On September 4, 2009, we, VeriChip Acquisition Corp., a Delaware corporation and our wholly-owned subsidiary, or the Acquisition Subsidiary, and Steel Vault Corporation, a Delaware corporation, or Steel Vault, signed an Agreement and Plan of Reorganization, or the Merger Agreement, dated September 4, 2009, as amended, pursuant to which the Acquisition Subsidiary was merged with and into Steel Vault on November 10, 2009, with Steel Vault surviving and becoming our wholly-owned subsidiary, or the Merger. Upon the consummation of the Merger, each outstanding share of Steel Vault’s common stock, warrants and options was converted into 12.5 shares of our common stock, warrants and options. At the closing of the Merger, we changed our name to PositiveID Corporation.

 

On February 11, 2010, we entered into an asset purchase agreement, or the Easy Check Asset Purchase Agreement, with Easy Check Medical Diagnostics, LLC, or Easy Check, whereby we acquired the assets of Easy Check, which included the breath glucose detection system and the iglucose wireless communication system. These products were in the development stage. In exchange for the assets, we issued 12,000 shares of our common stock valued at approximately $351,000. Additional payment in the form of shares (maximum 8,000 shares) and product royalties may be paid in the future based on successful patent grants and product or license revenues. On February 24, 2011, we issued 8,000 shares of our common stock to Easy Check to amend the Easy Check Asset Purchase Agreement.

 

On May 23, 2011, we entered into a Stock Purchase Agreement to acquire MFS, pursuant to which MFS became a wholly-owned subsidiary. MFS 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 April 18, 2013, our stockholders approved a reverse stock split within a range of between 1-for-10 to 1-for-25.  On that same date our Board of Directors approved a reverse stock split in the ratio of 1-for-25 and we filed a Certificate of Amendment to our Second Amended and Restated Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware to affect the reverse stock split.  On April 23, 2013, the reverse stock split became effective.  All share amounts in this Prospectus have been adjusted to reflect the 1-for 25 reverse stock split.

 

On May 10, 2013, the Company entered into an investment agreement (the “Investment Agreement”) and a registration rights agreement (the “RRA”) with IBC Funds LLC (“IBC”), a Nevada limited liability company. Pursuant to the terms of the Investment Agreement, IBC committed to purchase up to $5,000,000 of the Company’s common stock over a period of up to thirty-six (36) months. From time to time during the thirty-six (36) month period commencing on the day immediately following the effectiveness of the IBC Registration Statement (defined below), the Company may deliver a drawdown notice to IBC which states the dollar amount that the Company intends to sell to IBC on a date specified in the drawdown notice. The maximum investment amount per notice shall be equal to two hundred percent (200%) of the average daily volume of the common stock for the ten consecutive trading days immediately prior to date of the applicable drawdown notice so long as such amount does not exceed 4.99% of the outstanding shares of the Company’s common stock. The purchase price per share to be paid by IBC shall be calculated at a twenty percent (20%) discount to the average of the three lowest prices of the Company’s common stock during the ten (10) consecutive trading days immediately prior to the receipt by IBC of the drawdown notice. Additionally, the Investment Agreement provides for a commitment fee to IBC of 104,000 shares of the Company's common stock (the “IBC Commitment Shares”). The IBC Commitment Shares were issued May 10, 2013. Such commitment shares were recorded as a cost of capital, or reduction of shareholder’s equity when issued.

 

Pursuant to the RRA, the Company is obligated to file a registration statement (the “IBC Registration Statement”) with the Securities and Exchange Commission covering the shares of its common stock underlying the Investment Agreement, including the IBC Commitment Shares, within 21 days after the closing of the transaction. Such IBC Registration Statement was filed on May 10, 2013.

 

On May 10, 2013, the Company entered into a Securities Purchase Agreement with IBC whereby IBC agreed to purchase 40,064, shares of common stock for $12,500. The proceeds of the sale of the shares will be used to fund the Company’s legal expenses associated with the Investment Agreement. These shares were included in the IBC Registration Statement filed May 10, 2013.

  

As of September 30, 2013, the Company issued 4,500,000 shares to IBC under the equity line (inclusive of the commitment shares), for which it received $333,802, net of fees, in proceeds.

 

 
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On June 5, 2013, the Company entered into a Settlement and Agreement and Release (the “Settlement Agreement”) with IBC pursuant to which the Company agreed to issue common stock to in exchange for the settlement of $214,535 (the “Settlement Amount”) of past-due accounts payable of the Company.  IBC purchased the accounts payable from certain vendors of the Company. On June 7, 2013, the Circuit Court of the Twelfth Judicial Circuit for Sarasota County, Florida (the “Court”), entered an order (the “Order”) approving, among other things, the fairness of the terms and conditions of an exchange pursuant to Section 3(a)(10) of the Securities Act, in accordance with a stipulation of settlement, pursuant to the Settlement Agreement between the Company and IBC, in the matter entitled IBC Funds, LLC v. PositiveID Corporation (the “Action”). IBC commenced the Action against the Company to recover an aggregate of $214,535 of past-due accounts payable of the Company (the “Claim”), which IBC had purchased from certain vendors of the Company pursuant to the terms of separate receivable purchase agreements between IBC and each of such vendors (the “Assigned Accounts”). The Assigned Accounts relate to certain legal, accounting, and financial services provided to the Company. The Settlement Agreement was entered into on June 5, 2013. The Order provides for the full and final settlement of the Claim and the Action. The Settlement Agreement became effective and binding upon the Company and IBC upon execution of the Order by the Court on June 7, 2013.

 

Pursuant to the terms of the Settlement Agreement approved by the Order, on June 7, 2013, the Company agreed to issue to IBC shares (the “Settlement Shares”) of the Company’s Common Stock. The Settlement Agreement provides that the Settlement Shares will be issued in one or more tranches, as necessary, sufficient to satisfy the Settlement Amount through the issuance of freely trading securities issued pursuant to Section 3(a)(10) of the Securities Act. Pursuant to the Settlement Agreement, IBC may deliver a request to the Company which states the dollar amount (designated in U.S. Dollars) of Common Stock to be issued to IBC (the “Share Request”). The parties agree that the total amount of Common Stock to be delivered by the Company to satisfy the Share Request shall be issued at a thirty percent (30%) discount to market based upon the average of the volume weighted average price of the Common Stock over the three (3) trading day period preceding the Share Request. Additional tranche requests shall be made as requested by IBC until the Settlement Amount is paid in full so long as the number of shares requested does not make IBC the owner of more than 4.99% of the outstanding shares of Common Stock at any given time. The Company has recorded a charge of $91,944 as of quarter ended September 30, 2013 representing the total cost to the company for settling the $214,535 claim by issuing shares of common stock at a 30% discount. As of September 30, 2013, the entire amount of the settlement was converted into 3,637,681 common shares. 

  

The Settlement Agreement provides that in no event shall the number of shares of Common Stock issued to IBC or its designee in connection with the Settlement Agreement, when aggregated with all other shares of Common Stock then beneficially owned by IBC and its affiliates (as calculated pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations thereunder), result in the beneficial ownership by IBC and its affiliates (as calculated pursuant to Section 13(d) of the Exchange Act and the rules and regulations thereunder) at any time of more than 4.99% of the Common Stock.

 

Beginning with the acquisition of MFS, the Company began a process to focus its operations on diagnostics and detection.  Since acquiring MFS, the Company has (i) sold substantially all of the assets of NationalCreditReport.com, which it had acquired in connection with the Steel Vault Merger, (ii) sold its VeriChip and HealthLink businesses (both described below), and (iii) entered into an exclusive license for its iglucose technology.  The Company will continue to seek either strategic partners or acquirers for its GlucoChip and its glucose breath detection system.

 

Our principal executive offices are located at 1690 South Congress Avenue, Suite 201, Delray Beach, Florida 33445. Our telephone number is (561) 805-8000.

 

GlucoChip is our trademark.  This Prospectus contains trademarks and trade names of other organizations and corporations.

 

Our Business

 

We are focused on the development of microfluidic systems for the automated preparation of and performance of biological assays in order to detect biological threats at high-value locations, as well as analyze samples in a medical environment. Our wholly-owned subsidiary, MFS, specializes in the development and production of automated instruments for detecting and processing biological samples. MFS has a substantial portfolio of intellectual property related to sample preparation and rapid medical testing applications. Since its inception, and prior to acquisition, MFS has received over $50 million in U.S. Government grants and contracts, primarily from the Department of Homeland Security, or DHS. Since our acquisition of MFS, we have submitted, or are in the process of submitting, bids on various potential U.S. Government contracts, and are planning to pursue Stage 1 of the DHS’s BioWatch Generation 3, Phase II opportunity, which is an autonomous biodetection program designed to protect the nation against biological threats. The Stage 1 contract is expected to have a performance period of 18 months. The full roll-out of BioWatch Generation 3 is estimated at $3.1 billion over the next five years.

 

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. MFS has developed and implemented its own biological assays, which is one of its core competencies. Further, we believe M-BAND was developed in accordance with DHS guidelines.

 

 
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In December 2012, the Company entered into a Sole and Exclusive License Agreement, or the Boeing License Agreement, a Teaming Agreement, or Teaming Agreement, and a Security Agreement, or Boeing Security Agreement, with The Boeing Company, or Boeing.

 

The Boeing License Agreement provides Boeing the exclusive license to sell PositiveID’s M-BAND airborne bio-threat detector for the DHS BioWatch Generation 3 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 has agreed to pay a license fee of $2.5 million to PositiveID in three installments, all of which has been paid.  Under the Teaming Agreement, and subject to certain conditions, the Company retained the exclusive rights to serve as the reagent and assay supplier of the 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.

 

On March 18, 2013, the Company entered into an Intercreditor and Non-Disturbance Agreement, or the Intercreditor Agreement, among PositiveID and MFS; VeriGreen Energy Corporation, Steel Vault Corporation, IFTH NY Sub, Inc., IFTH NJ Sub, Inc. Boeing and TCA Global Credit Master Fund, L.P., or TCA . The Intercreditor Agreement sets forth the agreement of Boeing and TCA as to their respective rights and obligations with respect to the Boeing Collateral (as described below) and the TCA Collateral (as described below) and their understanding relative to their respective positions in the Boeing Collateral and the TCA Collateral and clarifies that Boeing’s lien under the Boeing Security Agreement relates to the Company’s M-BAND technology.

 

The “Boeing Collateral” includes, among other things, all Intellectual Property Rights (as defined in the Intercreditor Agreement) in the M-BAND Technology (as defined in the Intercreditor Agreement), including without limitation certain patents and patent applications set forth in the Intercreditor Agreement. The TCA Collateral includes any and all property and assets of PositiveID. The liens of Boeing on the Boeing Collateral are senior and prior in right to the liens of TCA on the Boeing Collateral and such liens of TCA on the Boeing Collateral are junior and subordinate to the liens of Boeing on the Boeing Collateral.

 

Our Dragonfly and Firefly Dx systems are designed to deliver molecular diagnostic results from a sample in less than 30 minutes, which would enable accurate diagnostics leading to more rapid and effective treatment than what is currently available with existing systems. Firefly is being developed further for a broad range of biological detection situations including radiation-induced cell damage within the human body and strains of influenza.  The handheld Firefly system has already demonstrated the ability to detect and identify other common pathogens and diseases such as E. coli, methicillin-resistant staphylococcus aureus and human papilloma virus.

 

Between 2008 and 2013, we entered into development partnerships and/or acquired or disposed of certain technologies concentrated in the area of diabetes management and maintained our original business, VeriChip (defined below) in a dormant status.   Those products and their status are as follows:

 

VeriChip

 

Through the end of 2011, our business also included the VeriMed system, which uses an implantable passive RFID microchip, or the VeriChip. On January 11, 2012, we contributed certain assets and liabilities related to the VeriChip business, as well as all of our assets and liabilities relating to our Health Link business, which is a patient-controlled, online repository to store personal health information, to our wholly-owned subsidiary, PositiveID Animal Health, or Animal Health.  We ceased actively marketing the VeriChip business in January 2008 and the Health Link business in September 2010.

 

On January 11, 2012, VeriTeQ Acquisition Corporation, or VeriTeQ, which is owned and controlled by Scott R. Silverman, our former chairman and chief executive officer, purchased all of the outstanding capital stock of Animal Health in exchange for a secured promissory note in the amount of $200,000, or the Note, and 4 million shares of common stock of VeriTeQ representing a 10% ownership interest.  Our chief executive officer, Mr. Caragol, also serves on the Board of Directors of VeriTeQ. The Note is secured by substantially all of the assets of Animal Health pursuant to a security agreement dated January 11, 2012, or the VeriTeQ Security Agreement.

 

In connection with the sale, we entered into a license agreement with VeriTeQ dated January 11, 2012, or the Original License Agreement, which grants VeriTeQ a license to utilize our bio-sensor implantable RFID device that is protected under United States Patent No. 7,125,382, “Embedded Bio Sensor System,” or the Patent, for the purpose of designing and constructing, using, selling and offering to sell products or services related to the VeriChip business, but excluding the GlucoChip or any product or application involving blood glucose detection or diabetes management.  We will receive royalties in the amount of ten percent on all gross revenues arising out of or relating to VeriTeQ’s sale of products, whether by license or otherwise, specifically relating to the Patent, and a royalty of twenty percent on gross revenues that are generated under the Development and Supply Agreement between us and Medical Components, Inc., or Medcomp, dated April 2, 2009, to be calculated quarterly with royalty payments due within 30 days of each quarter end. The total cumulative royalty payments under the agreement with Medcomp will not exceed $600,000.

 

 
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The Company also entered into a shared services agreement with VeriTeQ on January 11, 2012, or the Shared Services Agreement, pursuant to which the Company agreed to provide certain services including accounting, office space, business development, sales and marketing to VeriTeQ in exchange for $30,000 per month.  The term of the Shared Services Agreement commenced on January 23, 2012. The first payment for such services is not payable until VeriTeQ receives gross proceeds of a financing of at least $500,000. On June 25, 2012, the Shared Services Agreement was amended, pursuant to which all amounts owed to the Company under the Shared Services Agreement as of May 31, 2012 were converted into shares of common stock of VeriTeQ. In addition, effective June 1, 2012, the monthly level of services was reduced and the charge for the shared services under the Shared Services Agreement was reduced from $30,000 to $12,000. Furthermore, on June 26, 2012, the Original License Agreement was amended pursuant to which the license was converted from a non-exclusive license to an exclusive license, subject to VeriTeQ meeting certain minimum royalty requirements as follows: 2013 - $400,000; 2014 - $800,000; and 2015 and thereafter - $1,600,000.

 

On August 28, 2012, the Company entered into an Asset Purchase Agreement with VeriTeQ, or the VeriTeQ Asset Purchase Agreement, whereby VeriTeQ purchased all of the intellectual property, including patents and patents pending, related to the Company’s embedded biosensor portfolio of intellectual property. Under the VeriTeQ Asset Purchase Agreement, the Company is to receive royalties in the amount of ten percent (10%) on all gross revenues arising out of or relating to VeriTeQ’s sale of products, whether by license or otherwise, specifically relating to the embedded biosensor intellectual property, to be calculated quarterly with royalty payments due within 30 days of each quarter end. In 2012, there were no minimum royalty requirements. Minimum royalty requirements thereafter, and through the remaining life of any of the patents and patents pending, are as follows: (i) 2013 - $400,000; (ii) 2014- $800,000; and 2015-and thereafter - $1,600,000.

 

Simultaneously with the VeriTeQ Asset Purchase Agreement, the Company entered into a license agreement with VeriTeQ granting the Company an exclusive, perpetual, transferable, worldwide and royalty-free license to the Patent and patents pending that are a component of the GlucoChip in the fields of blood glucose monitoring and diabetes management. In connection with the VeriTeQ Asset Purchase Agreement, the Original License Agreement, as amended June 26, 2012 was terminated. Also on August 28, 2012, the VeriTeQ Security Agreement was amended, pursuant to which the assets sold by the Company to VeriTeQ under the VeriTeQ Asset Purchase Agreement and the related royalty payments were added as collateral under the VeriTeQ Security Agreement.

 

On August 28, 2012, the Shared Services Agreement was further amended, pursuant to which, effective September 1, 2012, the level of services was reduced and the monthly charge for the shared services was reduced from $12,000 to $5,000. On April 22, 2013, the Company entered into a non-binding letter agreement with VeriTeQ in which the Company agreed to provide up to an additional $60,000 of support during April and May 2013.

 

On July 8, 2013, the Company entered into a Letter Agreement with VeriTeQ, to amend certain terms of several agreements between PositiveID and VeriTeQ. The Letter Agreement amended certain terms of the Shared Services Agreement entered into between PositiveID and VeriTeQ on January 11, 2012, as amended; the Asset Purchase Agreement entered into on August 28, 2012, as amended; and the Secured Promissory Note dated January 11, 2012.  The Letter Agreement defines the conditions of termination of the Shared Services Agreement, including payment of the approximate $290,000 owed from VeriTeQ to PositiveID, the elimination of minimum royalties payable to PositiveID under the Asset Purchase Agreement, as well as certain remedies if VeriTeQ fails to meet certain sales levels, and to amend the Note, which has a current balance of $228,000, to include a conversion feature under which the Note may be repaid, at VeriTeQ’s option, in equity in lieu of cash.

 

iglucose

 

The iglucose system 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 November 2011, we obtained Federal Drug Administration, or FDA, clearance.

 

On February 15, 2013, we entered into an agreement, or the SGMC Agreement, with SGMC, Easy Check, Easy-Check Medical Diagnostic Technologies Ltd., an Israeli company, and Benjamin Atkin, an individual, or Atkin, pursuant to which we licensed our iglucose™ technology 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. The parties to the SGMC Agreement were parties to that certain Easy Check Asset Purchase Agreement. We and Atkin were also parties to a consulting agreement dated as of February 10, 2010, which agreement was terminated upon entry into the SGMC Agreement.

 

Pursuant to the SGMC Agreement, we granted SGMC an exclusive right and license to the intellectual property rights in the iglucose patent applications; a non-exclusive right and license to use and make a “white label” version of the iglucose websites; a non-exclusive right and license to use all documents relating to the iglucose 510(k) application to the Food and Drug Administration of the United States Government; and an exclusive right and license to the iglucose trademark. We also agreed to transfer to SGMC all right, title, and interest in the www.iglucose.com and www.iglucose.net domain names.

 

 
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In consideration for the rights and licenses discussed above, and the transfer of the domain names, SGMC shall pay to us the amount set forth below for each glucose test strip sold by SGMC and any sublicensees of SGMC for which results are posted by SGMC via its communications servers, or the Consideration:

 

 

i.

$.0025 per strip sold until SGMC has paid aggregate Consideration of $1,000,000; and

 

ii.

$.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.

 

GlucoChip

 

The GlucoChip, a product that combines a glucose-sensing microtransponder based on our Patent number 7,125,382 entitled “Embedded Bio-Sensor System” with an in-vivo glucose sensor. Our patent covers a bio-sensor system that utilizes RFID technology, combining wireless communication with an implantable passively-powered on-chip transponder. We have partnered with Receptors, a technology company whose AFFINITY by DESIGN™ chemistry platform can be applied to the development of selective binding products, to develop an in-vivo glucose sensor to detect glucose levels in the human body. The glucose sensor is intended to be coupled with our microchip to read blood glucose levels through an external scanner.   In conjunction with Receptors, we intend to achieve the construction and demonstration of the bench top scale flow system and to continue an evaluation of potential strategic partners to commercialize the product.

 

Breath Glucose Test

 

The breath glucose test, currently under development, is a non-invasive glucose detection system that measures acetone levels in a patient’s exhaled breath. The association between acetone levels in the breath and glucose is well documented, but previous data on the acetone/glucose correlation has been insufficient for reliable statistics. The breath glucose test detection system combines a proprietary chemical mixture of sodium nitroprusside with breath exhalate, which is intended to create a new molecular compound that can be measured with its patent pending technology. We believe that the use of a heavy molecule to generate a chemical reaction that can be reliably measured may prove the close correlation between acetone concentrations found in a patient’s exhaled breath and glucose found in his or her blood. This could eliminate a patient’s need to prick his or her finger multiple times per day to get a blood sugar reading. In the first quarter of 2012, we commenced the first clinical trial of the breath glucose test, which is being held at Schneider Children’s Medical Center of Israel, a preeminent research hospital. The study is currently on hold pending a determination by the Company as to the potential changes in the study protocol. The purpose of the clinical study is to assess the feasibility of the breath glucose test compared to a standard invasive blood glucose meter and to assess the reliability of the breath glucose test in measuring blood glucose levels under conditions of altered blood glucose levels. The preliminary results of the first half of the study were non-conclusive.

 

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.

 

Manufacturing; Supply Arrangements

 

We have historically outsourced the manufacturing of all the hardware components of our systems to third parties. As of September 30, 2013, 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.

 

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, we are investigating 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. We do not expect the RoHS Directive will have a significant impact on our business.

 

 
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Government Regulation

 

Laws and Regulations Pertaining to RFID Technologies

 

The GlucoChip, which uses our implantable microchip, relies on low-power, localized use of radio frequency spectrum to operate. As a result, we must comply with U.S. Federal Communications Commission, or FCC, and Industry Canada regulations, as well as the laws and regulations of other jurisdictions governing the design, testing, marketing, operation and sale of RFID devices if and when we sell our products.

 

U.S. Federal Communications Commission Regulations

 

Under FCC regulations and Section 302 of the Communications Act, RFID devices must be authorized and comply with all applicable technical standards and labeling requirements prior to being marketed in the United States. The FCC’s rules prescribe technical, operational and design requirements for devices that operate on the electromagnetic spectrum at very low powers. The rules ensure that such devices do not cause interference to licensed spectrum services, mislead consumers regarding their operational capabilities or produce emissions that are harmful to human health. Our RFID devices are intentional radiators, as defined in the FCC’s rules. As such, our devices may not cause harmful interference to licensed services and must accept any interference received. We must construct all equipment in accordance with good engineering design as well as manufacturers’ practices.

 

Manufacturers of RFID devices must submit testing results and/or other technical information demonstrating compliance with the FCC’s rules in the form of an application for equipment authorization. The FCC processes each application when it is in a form acceptable for filing and, upon grant, issues an equipment identification number. Each of our RFID devices must bear a label which displays the equipment authorization number, as well as specific language set forth in the FCC’s rules. In addition, each device must include a user manual cautioning users that changes or modifications not expressly approved by the manufacturer could void the equipment authorization. As a condition of each FCC equipment authorization, we warrant that each of our devices marked under the grant and bearing the grant identifier will conform to all the technical and operational measurements submitted with the application. RFID devices used and/or sold in interstate commerce must meet these requirements or the equipment authorization may be revoked, the devices may be seized and a forfeiture may be assessed against the equipment authorization grantee. The FCC requires all holders of equipment authorizations to maintain a copy of each authorization together with all supporting documentation and make these records available for FCC inspection upon request. The FCC may also conduct periodic sampling tests of equipment to ensure compliance. We believe we are in substantial compliance with all FCC requirements applicable to our products and systems which are offered for sale or lease in the United States.

 

Regulation by the FDA

 

We expect that our breath glucose detection device and GlucoChip product will require FDA clearance.

 

FDA Premarket Clearance and Approval Requirements. Generally speaking, unless an exemption applies, 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, or FFDCA, or a premarket approval application, or 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:

 

 

quality system regulations, or QSR, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;

 

 

labeling regulations and FDA prohibitions against the promotion of regulated products for uncleared, unapproved or off-label uses;

 

 
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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;

 

 

medical device reporting, or MDR, regulations, which require that a manufacturer report to the FDA if the manufacturer’s device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur;

 

 

post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device; and

 

 

medical device tracking requirements apply when the failure of the device would be reasonably likely to have serious adverse health consequences.

 

Fraud and Abuse

 

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

 

Anti-Kickback Laws

 

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

 

Federal False Claims Act

 

We may become subject to the Federal False Claims Act, or 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.

 

 
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U.S. Federal Trade Commission Oversight

 

An increasing focus of the United States Federal Trade Commission’s, or 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, or 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, or 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.

 

Title 201, Section 17.00 of the Code of Massachusetts Regulations, or Regulation 201, establishes standards for the protection of personal information of Massachusetts residents. Under Regulation 201, we may be required to develop, implement and maintain a written information security program designed to protect such personal information. We may also be required to perform a risk assessment of our existing safeguards, and improve those areas where there is a reasonably foreseeable risk to the security, confidentiality and/or integrity of any electronic, paper or other records that contain personal information about Massachusetts residents. Although Regulation 201 itself does not include a remedy provision, the Massachusetts Attorney General may be able to levy fines against us pursuant to other laws, and we may also be exposed to liability from impacted individuals.

 

 
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Regulation of Government Bid Process and Contracting

 

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

 

Health Care Reform

 

The Patient Protection and Affordable Care Act, or Affordable Care Act, will likely have a dramatic effect on health care financing and insurance coverage for Americans.  A portion of the Affordable Care Act, referred to as the "Physician Sunshine Payment" provisions, requires applicable manufacturers and distributors of drugs, devices, biological, or medical supplies covered under Medicare, Medicaid or the Children's Health Insurance Program to report annually to the Department of Health and Human Services certain payments or other transfers of value to physicians and teaching hospitals. They also require applicable manufacturers and applicable group purchasing organizations to report certain information regarding the ownership or investment interests held by physicians or the immediate family members of physicians in such entities.  Final regulations implementing the Physician Sunshine Payment provisions were issued on February 8, 2013 and are effective on April 9, 2013. The required data must be collected beginning August 1, 2013 and reported to the Centers for Medicare and Medicaid Services by March 31, 2014. Civil monetary penalties apply for failure to report payments, transfers of value, or physician ownership interests..   In light of the scope of health care reform and the Affordable Care Act, and the uncertainties associated with how it will be implemented on the state and federal level, we cannot predict its impact on the PositiveID at this time.

 

Interoperability Standards

 

The HITECH Act requires meaningful use of certified health information technology products in order to receive certain stimulus payments or incentives from the federal government.  Regulations implementing these meaningful use standards are in various stages of development.  There is an increasing need for health care providers, government agencies, and others in the health care industry to use computer communication and recordkeeping technology that is compatible with other systems.  Many states and providers are developing systems for health information exchange.  To the extent that customers, government entities, and other stakeholders demand that our products, such as iglucose, be compatible with various communication systems, we could be required to incur costs and delays in developing and upgrading our software and products.

 

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 and Life Technologies Corporation will be the primary competitors for our products. 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 market among a number of 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 objective of our research and development program is to develop high-value molecular diagnostic products such as M-BAND and Dragonfly. We focus our efforts on four main areas: 1) assay development efforts to design, optimize and produce specific tests that leverage the systems and chemistry we have developed; 2) target discovery research to identify novel micro RNA targets to be used in the development of future assays; 3) 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 4) engineering efforts to extend the capabilities of our systems and to develop new systems. Total research and development expense was $149,000 and $185,000 for the three months ended September 30, 2013 and 2012, respectively, and $483,000 and $681,000 for the nine months ended September 30, 2013 and 2012, respectively.

 

 
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Employees

 

As of January 14, 2014, we had 8 full-time employees, of whom 3 were in management, finance and administration, 1 in marketing and business development, and 4 in research and development. 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.    

 

DESCRIPTION OF PROPERTY

 

Our corporate headquarters is located in Delray Beach, Florida, where we occupy approximately 3,000 square feet of office space, under a lease that expires on August 31, 2015.  Our MFS subsidiary is based in Pleasanton, California, where we lease approximately 6,250 square feet of office space under a lease that expires on April 30, 2015.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with our financial statements and the related notes. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Special Note Regarding Forward-Looking Statements and Business sections in this Prospectus. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

 

Overview

 

PositiveID, through its wholly-owned subsidiary MFS, develops molecular diagnostic systems for bio-threat detection and rapid medical testing.  The Company, through MFS, also develops fully automated pathogen detection systems and assays 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.  MFS is also developing automated pathogen detection systems for rapid diagnostics, both for clinical and point of need applications.

 

Since its inception, and prior to our acquisition of MFS in May 2011, MFS had received over $50 million in government grants and contract work for the Department of Defense, Department of Homeland Security (“DHS”), the Federal Bureau of Investigation, the National Aeronautics and Space Administration, the Defense Advanced Research Projects Agency and industrial clients. MFS holds a substantial portfolio of key patents/patents pending primarily for the automation of biological detection using real-time analysis for the rapid, reliable and specific identification of pathogens.

 

Beginning in 2011 and continuing into the first quarter of 2013, as a part of our refocusing our business, we set out to (1) align ourselves with strong strategic partners to prepare our M-BAND product for the DHS’s BioWatch Generation 3, Phase II program, which has been estimated to be a $3.1 billion program over five years; (2) identify a research and development contract to complete the development of our clinical/point of demand diagnostic platform, the Firefly Dx and Dragonfly systems; and (3) reduce our operating costs to focus solely on those initiatives.

 

Subsequent to acquiring MFS, the Company has: (1) sold substantially all of the assets of NationalCreditReport.com, which it had acquired in connection with the Steel Vault Merger in 2011; (2) sold its VeriChip and HealthLink businesses in 2012; (3) drastically reduced its operating cost and cash burn; (4) entered into a license agreement and teaming agreement with The Boeing Company (“Boeing”) for its M-BAND system in the fourth quarter of 2012; and (5) executed into an exclusive license for its iglucose technology in February, 2013. The Company will continue to either seek strategic partners or acquirers for its GlucoChip and its glucose breath detection system.

 

Results of Operations

 

Overview

 

In connection with our decision to sell the NationalCreditReport.com business in the second quarter of 2011, we classified certain assets of the subsidiary as held for sale in our consolidated balance sheets, and have presented its results of operations as discontinued operations in our consolidated statements of operations for the years ended December 31, 2012 and 2011. Since the sale of NationalCreditReport.com in 2011, we now operate in one segment and have not generated any revenue.

 

 
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Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

 

Revenue and Gross Profit

 

We reported no revenue or gross profit from continuing operations for the three months ended September 30, 2013 and 2012. Until such time as we are under a government contract for the BioWatch Generation 3 program, under contract for the final development of our diagnostic platform (which includes our Firefly Dx product), we do not anticipate generating significant revenue or gross profit. The Company has deferred the $2.5 million received in conjunction with the Boeing License Agreement (defined in Note 9) and anticipates recognizing the entire $2.5 million fee as revenue in accordance with applicable accounting literature and Securities and Exchange Commission (“SEC”) guidance.  The Company continues to bid on various potential new United States Government contracts; however, there can be no assurance that we will be successful in obtaining any such contracts.

 

Selling, General and Administrative Expense

 

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

 

Selling, general and administrative expense decreased by approximately $1.2 million, or 73%, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. The decrease was primarily attributable to a decrease in stock-based compensation and reductions in personnel costs, rent and other operating costs, pursuant to the Company’s efforts to reduce its operating costs.

 

Research and Development

 

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

 

Research and development expense decreased by $36,000, or 19%, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. The decrease was primarily attributable to the timing of the development expenses related to our molecular diagnostic products.

 

Other Income (Expense)

 

Other expense for the three months ended September 30, 2013 and 2012 was $196,000 and $116,000, respectively.  The increase of $80,000 is primarily the result of a charge to interest expense of $139,000 relating to extinguishment accounting in connection with an amendment to a debenture financing partially offset by the fair value adjustments of warrants.

 

Beneficial Conversion Dividend on Preferred Stock

 

Beneficial conversion dividend on preferred stock for the three months ended September 30, 2013 and 2012 was $2.5 million and $10.2 million, respectively.  This amount in both periods is a non-cash charge.  The decrease of $7.7 million is primarily the result of decreased Series F preferred conversions during the three months ended September 30, 2013.

 

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

 

Revenue and Gross Profit

 

We reported no revenue or gross profit from continuing operations for the nine months ended September 30, 2013 and 2012. Until such time as we are under a government contract for the BioWatch Generation 3 program, under contract for the final development of our diagnostic platform (which includes our Firefly Dx product), we do not anticipate generating significant revenue or gross profit. The Company has deferred the $2.5 million received in conjunction with the Boeing License Agreement (defined in Note 9) and anticipates recognizing the entire $2.5 million fee as revenue in accordance with applicable accounting literature and SEC guidance.  The Company continues to bid on various potential new U.S. Government contracts; however, there can be no assurance that we will be successful in obtaining any such contracts.

 

 
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Selling, General and Administrative Expense

 

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

 

Selling, general and administrative expense decreased by approximately $2.2 million, or 29%, for the nine months ended September 30, 2013 compared to the nine September ended September 30, 2012. The decrease was primarily attributable to a decrease in stock-based compensation and reductions in personnel costs, rent and other operating costs, pursuant to the Company’s efforts to reduce its operating costs.

 

Research and Development

 

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

 

Research and development expense decreased by $0.2 million, or 28%, for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. The decrease was primarily attributable to decrease in activities related to the development of our products.

 

Other Income (Expense)

 

Other expense for the nine months ended September 30, 2013 and 2012 was $363,000 and $55,000, respectively.  The increase of $308,000 is primarily the result of a charge to interest expense of $139,000 relating to extinguishment accounting in connection with an amendment to a debenture financing and increased interest expense from a higher level of borrowing in 2013.

 

Beneficial Conversion Dividend on Preferred Stock

 

Beneficial conversion dividend on preferred stock for the nine months ended September 30, 2013 and 2012 was $7.0 million and $15.1 million, respectively.  This amount in both periods is a non-cash charge.  The decrease of $8.1 million is primarily the result of decreased Series F preferred conversions during the nine months ended September 30, 2013.

 

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

 

Revenue and Gross Profit

 

We reported no revenue or gross profit from continuing operations for the years ended December 31, 2012 and 2011. Until such time as we are under a government contract for the BioWatch Generation 3 program, under contract for the final development of our diagnostic platform, or one or more of our products under development is successfully brought to market, we do not anticipate generating significant revenue or gross profit. Further, MFS reported no revenue or gross profit during the period from the date of acquisition of May 23, 2011 through December 31, 2012 as it had no active contracts until it entered into the Boeing License Agreement.  The Company has deferred the initial $1 million received in conjunction with the Boeing License Agreement and anticipates recognizing the entire $2.5 million fee as revenue in accordance with applicable accounting literature and SEC guidance.  The Company continues to bid on various potential new U.S. Government contracts; however, there can be no assurance that we will be successful in obtaining any such contracts.

 

Selling, General and Administrative Expense

 

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

 

Selling, general and administrative expense decreased by approximately $4.3 million, or 40%, for the year ended December 31, 2012 compared to the year ended December 31, 2011. The decrease was primarily attributable to a $2.0 million decrease in stock-based compensation and reductions in personnel, rent and other operating costs.

 

Stock-based compensation included in selling, general and administrative expense totaled approximately $1.8 million and $3.8 million for the years ended December 31, 2012 and 2011, respectively. The decrease was primarily the result of lower per share stock price in 2012.

 

 
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Research and Development

 

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

 

Research and development expense increased by approximately $0.1 million, or 10%, for the year ended December 31, 2012 compared to the year ended December 31, 2011. The increase was primarily attributable to an increase in activities related to the development of our molecular diagnostic products.

 

Impairment of Capitalized Cost

 

In conjunction with the Company’s decision to seek a strategic alternative such as the sale or license of the iglucose product and its associated intellectual property, the Company recorded an impairment charge of approximately $0.4 million.

 

Stock Compensation to Related Party

 

In connection with amendments to our former chief executive officer’s employment agreement relating to his ceasing to be our chief executive officer and chairman of the Board of Directors, we recorded non-cash charges totaling approximately $4.9 million in 2011 related to the value of stock issued to the individual pursuant to the amendment.

 

Loss from Discontinued Operations

 

Loss from discontinued operations totaled approximately $10,000 and $57,000 for the years ended December 31, 2012 and 2011, respectively. Historical revenue related to the NationalCreditReport.com business is included in the loss from discontinued operations totaled approximately $1.0 million for the year ended December 31, 2011.

 

In connection with the decision to sell the NationalCreditReport.com business, the carrying value of the subsidiary’s net assets was written down to their estimated fair value, determined based upon the proceeds realized upon the sale in July 2011. As a result, an impairment of the carrying value of intangible assets of approximately $0.6 million was recognized during the second quarter of 2011 and is included in the loss from discontinued operations for the year ended December 31, 2011.

 

Liquidity and Capital Resources

 

As of September 30, 2013, cash and cash equivalents totaled $98,000 compared to cash and cash equivalents of $111,000 at December 31, 2012.

 

Cash Flows from Operating Activities

 

Net cash used in operating activities totaled approximately $1.4 million and $2.5 million during the nine months ended September 30, 2013 and 2012, respectively, primarily to fund operating losses. This decrease in cash used in operating activities was primarily the result of the Company’s efforts to reduce operating expenses.

 

Cash Flows from Investing Activities

 

Net cash used in investing activities was not significant for the nine months ended September 30, 2013 or 2012.

 

Cash Flows from Financing Activities

 

Financing activities provided cash of approximately $1.4 million and $2.6 million during the nine months ended September 30, 2013 and 2012, respectively, primarily related to proceeds from the issuance of shares under the Company’s equity lines, the issuance of convertible notes and debentures, and the conversion of Series F Preferred Stock and related repayments of the related note receivable in the 2013 and 2012 periods (See Note 4).

 

 
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Financial Condition

 

As of September 30, 2013, we had a working capital deficiency of approximately $6.2 million and an accumulated deficit of approximately $122.5 million, compared to a working capital deficit of approximately $4.6 million and an accumulated deficit of approximately $111.3 million as of December 31, 2012. The decrease in working capital was primarily due to operating losses for the period, deferral of the Boeing license payments and the reclassification of the tax contingency as a current liability.

 

We have incurred operating losses since our inception. The current operating losses are the result of research and development expenditures, selling, general and administrative expenses related to our projects and products.  We expect our operating losses to continue through at least the next twelve months. These conditions raise substantial doubt about our ability to continue as a going concern.

 

Our ability to continue as a going concern is dependent upon our ability to obtain financing to fund the continued development of our products and to support working capital requirements. Until we are able to achieve operating profits, we will continue to seek to access the capital markets.   In the nine months ended September 30, 2013 we have raised approximately $1.4 million, net of $0.3 million principal payment, from a debenture, issuance of convertible debt, preferred stock conversions, and our equity line financings (See Note 4).  Additionally, in March and April 2013, we received $1.5 million under the Boeing License Agreement.

 

On May 10, 2013, the Company entered into an Investment Agreement with IBC Funds LLC (“IBC”). Pursuant to the terms of the Investment Agreement, IBC committed to purchase up to $5,000,000 of the Company’s common stock over a period of up to thirty-six (36) months. From time to time during the thirty-six (36) month period commencing on the day immediately following the effectiveness of the registration statement that was filed with the SEC on May 10, 2013 (the “IBC Registration Statement”), the Company may deliver a drawdown notice to IBC which states the dollar amount that the Company intends to sell to IBC on a date specified in the drawdown notice. The maximum investment amount per notice shall be equal to two hundred percent (200%) of the average daily volume of the common stock for the ten consecutive trading days immediately prior to date of the applicable drawdown notice so long as such amount does not exceed 4.99% of the outstanding shares of the Company’s common stock. The purchase price per share to be paid by IBC shall be calculated at a twenty percent (20%) discount to the average of the three lowest prices of the Company’s common stock during the ten (10) consecutive trading days immediately prior to the receipt by IBC of the drawdown notice. The IBC Registration Statement was declared effective on May 29, 2013. As of the quarter ended September 30, 2013, the Company issued 4,500,000 shares to IBC under the equity line (inclusive of the commitment shares), for which it received $333,802, net of fees,in proceeds.

 

On June 5, 2013, the Company entered into a Settlement and Agreement and Release (the “Settlement Agreement”) with IBC pursuant to which the Company agreed to issue common stock to in exchange for the settlement of $214,535 (the “Settlement Amount”) of past-due accounts payable of the Company.  IBC purchased the accounts payable from certain vendors of the Company. On June 7, 2013, the Circuit Court of the Twelfth Judicial Circuit for Sarasota County, Florida (the “Court”), entered an order (the “Order”) approving, among other things, the fairness of the terms and conditions of an exchange pursuant to Section 3(a)(10) of the Securities Act, in accordance with a stipulation of settlement, pursuant to the Settlement Agreement between the Company and IBC, in the matter entitled IBC Funds, LLC v. PositiveID Corporation (the “Action”). IBC commenced the Action against the Company to recover an aggregate of $214,535 of past-due accounts payable of the Company (the “Claim”), which IBC had purchased from certain vendors of the Company pursuant to the terms of separate receivable purchase agreements between IBC and each of such vendors (the “Assigned Accounts”). The Assigned Accounts relate to certain legal, accounting, and financial services provided to the Company. The Settlement Agreement was entered into on June 5, 2013. The Order provides for the full and final settlement of the Claim and the Action. The Settlement Agreement became effective and binding upon the Company and IBC upon execution of the Order by the Court on June 7, 2013.

 

Pursuant to the terms of the Settlement Agreement approved by the Order, on June 7, 2013, the Company agreed to issue to IBC shares (the “Settlement Shares”) of the Company’s Common Stock. The Settlement Agreement provides that the Settlement Shares will be issued in one or more tranches, as necessary, sufficient to satisfy the Settlement Amount through the issuance of freely trading securities issued pursuant to Section 3(a)(10) of the Securities Act. Pursuant to the Settlement Agreement, IBC may deliver a request to the Company which states the dollar amount (designated in U.S. Dollars) of Common Stock to be issued to IBC (the “Share Request”). The parties agree that the total amount of Common Stock to be delivered by the Company to satisfy the Share Request shall be issued at a thirty percent (30%) discount to market based upon the average of the volume weighted average price of the Common Stock over the three (3) trading day period preceding the Share Request. Additional tranche requests shall be made as requested by IBC until the Settlement Amount is paid in full so long as the number of shares requested does not make IBC the owner of more than 4.99% of the outstanding shares of Common Stock at any given time. The Company has recorded a charge of $91,944 as of September 30, 2013 representing the total cost to the company for settling the $214,535 claim by issuing shares of common stock at a 30% discount. As of quarter ended September 30, 2013, the entire amount of the settlement was converted into 3,637,681 common shares.

 

The Settlement Agreement provides that in no event shall the number of shares of Common Stock issued to IBC or its designee in connection with the Settlement Agreement, when aggregated with all other shares of Common Stock then beneficially owned by IBC and its affiliates (as calculated pursuant to Section 13(d) of the Exchange Act, and the rules and regulations thereunder), result in the beneficial ownership by IBC and its affiliates (as calculated pursuant to Section 13(d) of the Exchange Act and the rules and regulations thereunder) at any time of more than 4.99% of the Common Stock.

 

 
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On August 26, 2013, the Company entered into a Stock Purchase Agreement and a Registration Rights Agreement (collectively, the “August 2013 Agreements”) with Ironridge Global IV, Ltd., a British Virgin Islands business company. Pursuant to the August 2013 Agreements, the Company agreed to issue 450 shares of Series F Preferred Stock to Ironridge in exchange for $300,000. Additionally, the Company issued 100 shares and 50 shares of Series F as commitment and documentation fees, respectively.

 

On November 13, 2013 the Company entered into a Stock Purchase Agreement ( the “Stock Purchase Agreement”) with Hudson Bay Master Fund Ltd. and seven other accredited purchaser (“Purchasers”) and on November 8, 2013, the Company entered into a Letter agreement (“November Letter”) with VeriTeQ Corporation. On that same date Hudson and VeriTeQ entered into a financing transaction. Pursuant to the Stock Purchase Agreement, the Company sold its remaining VeriTeQ common shares (871,754) and the convertible note owed from VeriTeQ to the Company (convertible into 135,793 shares of VeriTeQ common shares). Total proceeds from the sale are $750,000, which were received on November 13, 2013. Pursuant to the November Letter, the Company is entitled to receive a warrant to purchase 300,000 shares of VeriTeQ common stock at price of $2.84. The warrant is to have the identical terms as the warrant agreement between Hudons and VeriTeQ, including a life of 5 years and customary pricing reset provisions. The November Letter also specified that the remaining outstanding payable balance owed from VeriTeQ to the Company would be repaid pursuant to the following schedule: (a) $100,000 paid upon VeriTeQ raising capital in excess of $3 million (excluding the Hudson transaction of November 13, 2013), (b) within 30 and 60 days after the initial $100,000 payment, VeriTeQ shall pay $50,000 each (total of and additional $100,000) to the Company, and (c) the remaining balance of the payable (approximately $12,000) will be paid within 90 days after the initial $100,000 payment.

 

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. 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 condensed consolidated financial statements do not include any adjustments relating recoverability of assets and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

 

For the Year Ended December 31, 2012

 

As of December 31, 2012, cash and cash equivalents totaled approximately $111,000 compared to cash and cash equivalents of approximately $28,000 at December 31, 2011.

 

Cash Flows from Operating Activities

 

Net cash used in operating activities totaled approximately $3.0 million during the year ended December 31, 2012 and approximately $6.7 million during the year ended December 31, 2011, primarily to fund operating losses. The improvement primarily resulted from our cost reduction initiatives and growth in our short-term debt, and deferred revenue.  Net cash used in discontinued operations was approximately $0.5 million during the year ended December 31, 2011 and $10,000 during the year ended December 31, 2012.

 

In January 2010, Stanley received a notice from the CRA that the CRA would be performing a review of Xmark’s Canadian tax returns for the periods 2005 through 2008. The review covered all periods that we owned Xmark. In February 2011, and as revised on November 9, 2011, Stanley received a notice from the CRA that the CRA completed its review of the Xmark returns and was questioning certain deductions on the tax returns under review. In November and December 2011, the CRA and the Ministry of Revenue of the Province of Ontario issued notices of reassessment confirming the proposed adjustments. The total amount of the income tax reassessments for the 2006-2008 tax years, including both provincial and federal reassessments, plus interest, was approximately $1.4 million.

 

On January 20, 2012, we received an indemnification claim notice from Stanley related to the matter. We do not agree with the position taken by the CRA, and filed a formal appeal related to the matter on March 8, 2012. In addition, on March 28, 2012, Stanley received assessments for withholding taxes on deemed dividends in respect of the disallowed management fees totaling approximately $0.2 million, for which we filed a formal appeal on June 7, 2012. In October 2012, the Company submitted a Competent Authority filing to the U.S. IRS seeking relief in the matter.  In connection with the filing of the appeal, 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. Pursuant to a letter agreement dated March 7, 2012, we have agreed to repay Stanley for the upfront payment, plus interest at the rate of five percent per annum, in 24 equal monthly payments beginning on June 1, 2012. To the extent that we and Stanley reach a successful resolution of the matter through the appeals process, the upfront payment (or a portion thereof) will be returned to Stanley or us as applicable. Based on our review of the correspondence and evaluation of the supporting detail, we do not believe that the ultimate resolution of this matter will have a material negative impact on our historical tax liabilities or results of operations. We have established an accrual of $400,000 for this contingency as of December 31, 2012, which we believe is adequate.  During 2012 and continuing into 2013 the Company has been delinquent in its payments to Stanley.  The Company and Stanley have agreed to monthly payments of approximately $26,000 per month for 2013.  The Company is current with this adjusted schedule as of March 31, 2013.

 

Cash Flows from Investing Activities

 

Investing activities provided cash of approximately $0.7 million for the year ended December 31, 2011, primarily related to proceeds received from the sale of NationalCreditReport.com. Net cash used in investing activities was not significant for the year ended December 31, 2012.

 

Cash Flows from Financing Activities

 

Financing activities provided net cash of approximately $3.1 million and $4.3 million during the years ended December 31, 2012 and 2011, respectively, primarily related to proceeds from the issuance of preferred stock under the financing agreements with Ironridge Global III, LLC and Ironridge Global Technology, a division of Ironridge Global IV, Ltd.  During 2011, the Company also converted preferred shares with both Socius CG II, Ltd. and Optimus Technology Capital Partners, LLC, which resulted in proceeds in addition to the Ironridge financing agreements.

 

 
33

 

 

Financial Condition

 

As of December 31, 2012, we had a working capital deficiency of approximately $4.6 million and an accumulated deficit of approximately $111.3 million, compared to a working capital deficit of approximately $2.7 million and an accumulated deficit of approximately $86 million as of December 31, 2011. The decrease in working capital was primarily due to operating losses for the period, offset by cash received from Boeing under the “Boeing License Agreement,” proceeds from the sale common stock under our equity line financing and capital raised through preferred stock and convertible debt financings.

 

We have incurred operating losses prior to and since the merger that created PositiveID. The current operating losses are the result of research and development expenditures, selling, general and administrative expenses related to our projects and products.  We expect our operating losses to continue through 2013. These conditions raise substantial doubt about our ability to continue as a going concern.

 

Our ability to continue as a going concern is dependent upon our ability to obtain financing to fund the continued development of our products and to support working capital requirements. Until we are able to achieve operating profits, we will continue to seek to access the capital markets.  In 2011 and 2012, we raised approximately $7.4 million from the issuance of convertible preferred stock, common stock under an equity line financing, and convertible debt.  Subsequent to year end December 31, 2012 we have raised approximately $1.0 million, net, from a new promissory note, convertible debt, preferred stock conversions, and our equity line financing.  Additionally, in March and April 2013 we received $1,500,000 under the Boeing License Agreement with Boeing.

 

During 2013, we will need to raise additional capital, including capital not currently available under our current financing agreements in order to execute our business plan.

 

On August 31, 2011, we received notification that our stock was being delisted from the Nasdaq Capital Market and on September 1, 2011, our stock began trading on the OTC Markets.

 

We intend to continue to access capital to provide funds to meet our working capital requirements for the near-term future. In addition and if necessary, we could reduce and/or delay certain discretionary research, development and related activities and costs. However, there can be no assurances that we will be able to derive sufficient funding under the Ironridge facilities or be successful in negotiating additional sources of equity or credit for our long-term capital needs.  Our inability to have continuous access to such financing at reasonable costs could materially and adversely impact our financial condition, results of operations and cash flows, and result in significant dilution to our existing stockholders.

 

Critical Accounting Policies and Estimates

 

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

 

Revenue Recognition

 

Revenue is recognized when persuasive evidence of an arrangement exists, collectability of arrangement consideration is reasonably assured, the arrangement fees are fixed or determinable and delivery of the product or service has been completed.

 

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

 

In October 2009, the Financial Accounting Standard Board, or FASB, issued amended revenue recognition guidance for arrangements with multiple deliverables. The new guidance requires the use of management’s best estimate of selling price for the deliverables in an arrangement when vendor specific objective evidence, vendor objective evidence or third party evidence of the selling price is not available. In addition, excluding specific software revenue guidance, the residual method of allocating arrangement consideration is no longer permitted, and an entity is required to allocate arrangement consideration using the relative selling price method.

 

 
34

 

 

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

 

 

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

 

 

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

 

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

 

Intangible Assets

 

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.

 

In assessing potential impairment of the intangible assets and goodwill recorded in connection with the MFS acquisition as of December 31, 2012, we considered the likelihood of future cash flows attributable to such assets, including but not limited to cash received from Boeing and the probability and extent of MFS’s participation in the DHS’s BioWatch Generation 3 program, for which a final Request for Proposal for Stage 1 of the procurement is expected to be released by the second quarter of 2013. Based on our analysis, we have concluded based on information currently available, that no impairment of the intangible assets or goodwill exists as of December 31, 2012.

 

Stock-Based Compensation

 

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

 

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

 

 

the estimated value of our common stock;

 

 

the expected life of issued stock options;

 

 

the expected volatility of our stock price;

 

 

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

 

 

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

 

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

 

Accounting for Income Taxes

 

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

 

 
35

 

 

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

 

 

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

 

 

if a position is determined to be more likely than not of being sustained, the reporting enterprise recognizes the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority.

 

We continue to fully recognize our tax benefits, which are offset by a valuation allowance to the extent that it is more likely than not that the deferred tax assets will not be realized. We have analyzed our filing positions in all of the foreign, federal and state jurisdictions where the Company is required to file income tax returns, as well as all open tax years in these jurisdictions. As a result, we have not recorded a tax liability and have no unrecognized tax benefits as of December 31, 2012 or 2011.

 

DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors

 

Our directors, their ages and business experience, as of January 14, 2014, are set forth below:  

 

Name

 

Positions with the Company

William J. Caragol

 

Chairman, Chief Executive Officer, and Acting Chief Financial Officer

Jeffrey S. Cobb

 

Director

Michael E. Krawitz

 

Director

Ned L. Siegel

 

Director

 

William J. Caragol, 46, has served as our chief executive officer since August 26, 2011 and as our chairman of the Board of Directors since December 6, 2011 and previously served as our president from May 2007 until August 26, 2011, our chief financial officer from August 2006 through August 26, 2011, and treasurer since December 2006.  Since September 28, 2012, Mr. Caragol has also been our acting chief financial officer.  Mr. Caragol served as Steel Vault’s president and a member of its Board of Directors from December 3, 2008 and as acting chief financial officer from October 24, 2008 until November 11, 2009 when Steel Vault became our wholly-owned subsidiary. Mr. Caragol served as acting chief executive officer of Steel Vault from October 24, 2008 until December 3, 2008 when he was appointed chief executive officer. Mr. Caragol serves on the Board of Trustees of Saint Andrews School.  Mr. Caragol served as a member of the Board of Directors of Gulfstream International Group, Inc. from September to October 2010 and on the Board of Directors of VeriTeQ Corporation until July 8, 2013.  He is a member of the American Institute of Certified Public Accountants and graduated from the Washington & Lee University with a bachelor of science in Administration and Accounting. The Board of Directors nominated Mr. Caragol as a director because of his past experience as a senior executive of other companies in the technology industry and because he holds the position of chief executive officer.

 

Jeffrey S. Cobb, 52, has served as a member of our Board of Directors since March 2007. Since April 2004, Mr. Cobb is the chief operating officer of IT Resource Solutions.net, Inc. Mr. Cobb served as a member of the board of directors of Steel Vault from March 2004 through July 22, 2008. Mr. Cobb earned his bachelor of science in Marketing and Management from Jacksonville University. Mr. Cobb was nominated to the Board of Directors because of his management and business development experience in technology companies.

 

Michael E. Krawitz, 44, has served as a member of our Board of Directors since November 2008. He currently serves as chief executive officer of PEAR, LLC, a provider of green retrofitting and renewable energy since February 2011. From July 2010 until February 2011, he served as chief executive officer of Florida Sunshine Investments I, Inc. He previously served as the chief executive officer and president of VeriTeQ Corporation from December 2006 to December 2007, executive vice president from March 2003 until December 2006, and as a member of its board of directors from July 2007 until December 2007. He was re-appointed to the VeriTeQ board of directors on July 5, 2013. Mr. Krawitz served as a member on the board of directors of Steel Vault from July 23, 2008 until November 11, 2009. Mr. Krawitz earned a bachelor of arts degree from Cornell University in 1991 and a juris doctorate from Harvard Law School in 1994. Mr. Krawitz was nominated to the Board of Directors due to his past experience as a chief executive officer of Digital Angel, our former parent company, as well as his experience as an attorney.

 

Ned L. Siegel, 62, has served as a member of our Board of Directors since February 2011.  He has served as President of the Siegel Group, Inc. since September 1997, and Managing Member of the Siegel Consulting Group, LLC since November 2009, which provide real estate development and realty management services.  From October 2007 until January 2009, he served as United States Ambassador to the Commonwealth of the Bahamas. Mr. Siegel was appointed Vice Chairman of Alternative Fuels Americas, Inc. in January of 2011. Mr. Siegel earned a bachelor of arts degree from the University of Connecticut in 1973 and a juris doctorate from the Dickinson School of Law in 1976.  Mr. Siegel was nominated to the Board of Directors due to his past experience with government appointments and services and his managerial experience.

 

 
36

 

  

Executive Officers

 

Our executive officer, his age and positions, as of January 14, 2014, is set forth below:  

 

Name

 

Age

 

Position

William J. Caragol

 

46

 

Chairman of the Board, Chief Executive Officer and Acting Chief Financial Officer

 

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

 

Audit Committee

 

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

 

The audit committee assists our Board of Directors in its oversight of:

 

 

our accounting, financial reporting processes, audits and the integrity of our financial statements;

 

 

our independent auditor’s qualifications, independence and performance;

 

 

our compliance with legal and regulatory requirements;

 

 

our internal accounting and financial controls; and

 

 

our audited financial statements and reports, and the discussion of the statements and reports with management, including any significant adjustments, management judgments and estimates, new accounting policies and disagreements with management.

 

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

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires that our officers and directors and persons who own more than 10% of our common stock file reports of ownership and changes in ownership with the SEC and furnish us with copies of all such reports. Based solely on a review of copies of such forms and written representations from our directors, executive officers and 10% owners, we believe that for the fiscal year of 2012, all of our directors, executive officers and 10% owners were in compliance with the disclosure requirements of Section 16(a).

 

Code of Business Conduct and Ethics

 

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

 

 
37

 

 

EXECUTIVE COMPENSATION

 

The following table sets forth information regarding compensation earned in or with respect to our fiscal year 2012 and 2013 by:

 

 

each person who served as our chief executive officer in 2013; and

 

 

each person who served as our chief financial officer in 2013.

 

We had no other executive officers during any part of 2013.

 

Summary Compensation Table

 

Name and

Principal Position

 

Year

 

Salary

($)

   

Bonus

($)

   

Stock

Awards

($)

   

Option

Awards

($)

   

Non-Equity

Incentive

Plan

Compensation

($)

   

All Other

Compensation

($)

   

Total

($)

 
                                                             

William J. Caragol

 

2013

    275,000 (1)     138,000 (2)     51,250 (3)                 47,655 (4)     578,905  

Chairman, Chief Executive Officer and Acting Chief Financial Officer

 

2012

    275,000 (5)     205,000 (6)     350,000 (3)                 47,647 (7)     672,647  

 

 

(1)

Represents the $275,000 salary pursuant to Mr. Caragol’s employment contract.  Of this amount $190,385 was paid during 2013, and the remainder was deferred.

 

(2)

Represents the face value of 138 Series I Preferred Stock which was granted to Mr. Caragol as bonus compensation for 2013. 

 

(3)

Represents the aggregate grant date fair value, of 100,000 shares of our common stock.

 

(4)

The amount shown includes (i) $25,000 for an expense allowance, which amount was converted to Series I Preferred Stock as part of the liability reduction plan; and (ii) $22,655 for an automobile lease, insurance and gasoline expenses.

 

(5)

Represents the $275,000 salary pursuant to Mr. Caragol’s employment contract.  Of this amount $135,558 was paid during 2012, the remainder of which was paid in 2013 ($75,000 in cash and the remainder in Series I Preferred Stock).

 

(6)

Represent s aggregate grant date fair value of 100,000 shares of our common stock issued as bonus for 2012.

 

(7)

The amount shown includes (i) $248 in respect of long-term disability insurance provided to Mr. Caragol; (ii) $25,000 for an expense allowance, which amount was converted to Series I Preferred Stock as part of the liability reduction plan; and (iii) $22,399 for an automobile lease, insurance and gasoline expenses.

 

Narrative Disclosure to Summary Compensation Table and Additional Narrative Disclosure

 

Executive Employment Arrangements

 

2011 Executive Employment Arrangements

 

On November 10, 2010, our Compensation Committee approved a five year employment and non-compete agreement for Mr. Caragol. Beginning in 2011, Mr. Caragol began receiving a base salary of $225,000.  His salary was set to increase a minimum of 5% per annum during each calendar year of the term.  During the term, Mr. Caragol was due to receive a minimum annual bonus for each calendar year of the term in an amount equal to a minimum of one (1) times such executive’s base salary.  Additionally, the Compensation Committee has the authority to approve a discretionary bonus for each year of the term. In 2010, Mr. Caragol received 30,000 shares of restricted stock, under the PositiveID Corporation 2009 Stock Incentive Plan. These restricted shares vested according to the following schedule: (i) 50% vest on January 1, 2012; and (ii) 50% vest on January 1, 2013. Mr. Caragol’s rights and interests in the unvested portion of the restricted stock were subject to forfeiture in the event he resigned prior to January 1, 2013 or was terminated for cause prior to January 1, 2013, with said cause being defined as a conviction of a felony or such person being prevented from providing services to us as a result of such person’s violation of any law, regulation and/or rule. Mr. Caragol is also entitled to Company-paid health insurance and disability insurance, non-allocable expenses of $25,000, and is entitled to use of an automobile leased by us and other automobile expenses, including insurance, gasoline and maintenance costs.

 

If Mr. Caragol’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 five times the then current base salary and five times the average bonus paid to Mr. Caragol for the three full 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.  Upon a change of control, we must continue to pay all lease payments on the vehicle then used by executive. 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.

 

 
38

 

 

On September 30, 2011, our Compensation Committee approved a two year employment and non-compete agreement for Bryan D. Happ, our chief financial officer. Under the employment agreement, Mr. Happ was to receive a base salary of $180,000, subject to a minimum increase of 5% per annum during each calendar year of the term.  During the term, Mr. Happ was eligible to receive a discretionary bonus for each year of the term with a target incentive compensation between 50% and 100% of his base salary then being paid. Mr. Happ was also entitled to receive Company-paid health and disability insurance during the term of the employment agreement.  If Mr. Happ’s employment was terminated prior to the expiration of the term, certain payments were to become due.  The amount of such payments depended on the nature of the termination and whether the termination occurred before or after one year from the date of the employment agreement. In the event Mr. Happ was terminated without cause on or before one year from the date of the employment agreement, Mr. Happ was entitled to one times his then current base salary and any bonus paid by us within one year from the date of the employment agreement. In the event Mr. Happ was terminated without cause after one year from the date of the employment agreement, Mr. Happ was entitled to two times his then current base salary and the average bonus paid by us within the last two calendar years (or such lesser period if the employment agreement is terminated less than two years from the date of the employment agreement).

 

Amendments to 2011 Executive Employment Arrangements

 

Mr. Caragol's annual base salary was increased from $225,000 to $275,000 in connection with his appointment as our chief executive officer effective August 26, 2011.

 

On December 6, 2011, the Compensation Committee approved a First Amendment to Employment and Non-Compete Agreement, or the First Amendment, between us and William J. Caragol, our chief executive officer, in connection with Mr. Caragol’s assumption of the position of chairman of the Board of Directors effective December 6, 2011. The First Amendment amends the Employment and Non-Compete Agreement dated November 11, 2010, between us and Mr. Caragol and provides for, among other things, the elimination of any future guaranteed raises and bonuses, other than a 2011 bonus of $375,000  to be paid beginning January 1, 2012 in twelve (12) equal monthly payments.   This bonus was not paid during 2012 and on January 8, 2013, $300,000 of such bonus was converted into 738,916 shares of our restricted common stock, which vest on January 1, 2016.  The remaining $75,000 was deferred and in 2013 was converted into 75 shares of Series I Preferred Stock.  In addition, the First Amendment amends the change of control provision by increasing the multiplier from 3 to 5 and capping any change in control compensation to 10% of the transaction value.  The First Amendment also obligates us to grant to Mr. Caragol an aggregate of 500,000 shares of restricted stock over a 4 year period as follows: (i) 100,000 shares upon execution of the First Amendment, which shall vest on January 1, 2014, (ii) 100,000 shares on January 1, 2012, which shall vest on January 1, 2015, (iii) 100,000 shares on January 1, 2013, which shall vest on January 1, 2015, (iv) 100,000 shares on January 1, 2014, which shall vest on January 1, 2016, and (v) 100,000 shares on January 1, 2015, which shall vest on January 1, 2016.   We and Mr. Caragol agreed to delay the issuance of the first and second restricted share grants, for a total of 200,000 shares, until we had available shares under one of our stock incentive plans. The restricted shares were granted on October 4, 2012. Upon a change in control or in the event that Mr. Caragol terminates his employment for “constructive termination” (as such term is defined his employment agreement) or in the event we terminate his employment without cause, the restricted stock described above shall be issued within five (5) business days of such triggering event and all of the restricted stock shall vest immediately. If Mr. Caragol resigns, is terminated for cause, or his employment is terminated due to his death or disability, Mr. Caragol will forfeit the restricted shares discussed above.

 

On September 28, 2012, the employment of Bryan D. Happ, our chief financial officer terminated. In connection with the termination of Happ’s Employment and Non-Compete Agreement dated September 30, 2011, we and Mr. Happ entered into a Separation Agreement and General Release, or the Separation Agreement, on September 28, 2012. Pursuant to the Separation Agreement, Mr. Happ is due to receive payments totaling $404,423, or the Compensation, consisting of past-due accrued and unpaid salary and bonus amounts plus termination compensation. Of the Compensation, $100,000 was paid with 200,000 shares of our restricted common stock (such shares not issued under a stockholder approved plan) and $304,423 will be paid in cash. The cash balance of $304,423 will be repaid at a rate of $3,700 per bi-weekly pay period, subject to accelerated payment under certain events.  As of December 31, 2013, we have paid $120,900 of the cash balance to Mr. Happ.

 

Also effective September 28, 2012, we appointed William J. Caragol, our chairman and chief executive officer, as our acting chief financial officer.

 

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

 

Outstanding Equity Awards as Of December 31, 2013

 

The following table provides information as of December 31, 2013 regarding unexercised stock options and restricted stock outstanding held by Mr. Caragol:

 

 
39

 

 

Outstanding Equity Awards as of December 31, 2013

 

   

Option Awards

   

Stock Awards

 

Name

 

Number of

Securities

Underlying

Unexercised

Options

(#)

Exercisable

   

Number of

Securities

Underlying

Unexercised

Options(#)

Unexercisable

   

Equity

Incentive

Plan

Awards:

Number of

Securities

Underlying

Unexercised

Unearned

Options

(#)

   

Option

Exercise

Price

($)

   

Option

Expiration

Date

   

Number

of Shares

or Units

of Stock

That

Have Not

Vested

(#)(1)

   

Market

Value of

Shares or

Units of

Stock That

Have Not

Vested

($)(2)

   

Equity

Incentive

Plan

Awards:

Number

of

Unearned

Shares,

Units or

Other

Rights

That

Have Not

Vested

(#)(1)

   

Equity

Incentive

Plan

Awards:

Market

or Payout

Value of

Unearned

Shares,

Units or

Other

Rights

That

Have Not

Vested

($)(2)

 

William J. Caragol

    2,000                 $ 250.00    

8/21/2016

                         
                                    300,000     $ 8,280              
                                                200,000     $ 5,520  

 

(1)

Pursuant to Mr. Caragol’s employment agreements we are obligated to grant to Mr. Caragol an aggregate of 500,000 shares of restricted stock over a 4 year period as follows: (i) 100,000 shares upon execution of the agreement, which shall vest on January 1, 2014, (ii) 100,000 shares on January 1, 2012, which shall vest on January 1, 2015, (iii) 100,000 shares on January 1, 2013, which shall vest on January 1, 2015, (iv) 100,000 shares on January 1, 2014, which shall vest on January 1, 2016, and (v) 100,000 shares on January 1, 2015, which shall vest on January 1, 2016. Upon a change in control or in the event that Mr. Caragol terminates his employment for “constructive termination” (as such term is defined his employment agreement) or in the event we terminate his employment without cause, the restricted stock described above shall be issued within five (5) business days of such triggering event and all of the restricted stock shall vest immediately. If Mr. Caragol resigns, is terminated for cause, or his employment is terminated due to his death or disability, Mr. Caragol will forfeit the restricted shares discussed above.

 

(2)

Computed by multiplying the closing market price of a share of our common stock on December 31, 2013, or $0.0276, by the number of shares of common stock that have not vested.

 

Director Compensation

 

The following table provides compensation information for persons serving as members of our Board of Directors during 2013:

 

 
40

 

 

2013 Director Compensation

 

Name

 

Fees

 

Stock Awards

 

Option

 

Non-Equity

 

Nonqualified

 

All Other

 

Total

   

Earned

 

($) (2)

 

Awards

 

Incentive Plan

 

Deferred

 

Compensation

 

($)

   

or Paid

     

($)(1)

 

Compensation

 

Compensation

 

($) (3)

   
   

in Cash

         

($)

 

Earnings

       

 

 

($)(1)

 

 

 

 

 

 

 

 

 

 

 

 

Jeffrey S. Cobb

 

44,000

 

            30,750

(4)

0

 

0

 

0

 

75,000

 

149,750

Barry M. Edelstein

 

28,000

 

            30,750

(5)

0

 

0

 

0

 

75,000

 

133,750

Michael E. Krawitz

 

52,000

 

            51,250

(6)

0

 

0

 

0

 

285,000

 

388,250

Ned L. Siegel

 

49,000

 

            61,500

(7)

0

 

0

 

0

 

75,000

 

185,500

 

 

(1)

During 2013 $148,000 of these fees were paid through the conversion of amount owed to Series I Preferred Shares and transfer VeriTeQ Corporation common shares owned by the Company as part of the liability reduction plan. These fees are comprised of $5,000 per quarter, per director. Mr. Siegel and Mr. Krawitz as chairs of the audit committee and compensation committee, respectively, received $2,500 per quarter in addition to the base fee. Additionally, the directors earned $1,000 per telephonic meeting and $2,000 per in person meeting. During 2013 there were 20 meetings of the Board of Directors. 

 

(2)

The dollar amount of these awards reflected in the table represents the aggregate grant date fair value.

 

(3)

The amount shown includes aggregate of (i) $510,000 as compensation for out-of-pocket tax expense for previous equity awards as part of the tax equalization plan. These amounts wer settled on September 30, 2013 through the issuance of the Company's Series I Preferred Stock and the issuance of Company owned shares of VeriTeQ Corporation.

 

(4)

Mr. Cobb was granted 60,000 shares of our common stock on January 8, 2013, which vest on January 1, 2016. On December 31, 2013, Mr. Cobb was granted 500,000 shares of restricted common stock which vest on January 31, 2014. Additionally, Mr. Cobb was granted 25 shares of Series I convertible preferred stock, which vest on January 1, 2016. These grants were components of 2014 director’s compensation, and as such these amounts have not been included in 2013 Director Compensation.    

 

(5)

Mr. Edelstein was granted 60,000 shares of our common stock on January 8, 2013, which vest on January 1, 2016.

 

(6)

Mr. Krawitz was granted 100,000 shares of our common stock on January 8, 2013, which vest on January 1, 2016. On December 31, 2013, Mr. Krawitz was granted 500,000 shares of restricted common stock which vest on January 31, 2014. Additionally, Mr. Krawitz was granted 25 shares of Series I convertible preferred stock, which vest on January 1, 2016. These grants were components of 2014 director’s compensation, and as such these amounts have not been included in 2013 Director Compensation.     

 

(7)

Mr. Siegel was granted 100,000 shares of our common stock on January 8, 2013, which vest on January 1, 2016. On December 31, 2013, Mr. Siegel was granted 500,000 shares of restricted common stock which vest on January 31, 2014. Additionally, Mr. Siegel was granted 25 shares of Series I convertible preferred stock, which vest on January 1, 2016. These grants were components of 2014 director’s compensation, and as such these amounts have not been included in 2013 Director Compensation.    

  

On February 21, 2013, the Board of Directors approved the 2013 Board Compensation Plan, effective January 1, 2013, which included: (i) quarterly compensation of $5,000 to each director, (ii) quarterly compensation of $2,500 for the chairs of the audit and compensation committees, (iii) a per meeting fee of $2,000 for each in person Board meeting and $1,000 for each telephonic meeting, and (iv) a Tax Equalization plan, granting tax equalization payments to the Board members totaling $510,000.  The fees and equalization payments were intended to be made at such time as we have a reasonable level of working capital.

 

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

 

Subject to the Plan $590,000 of accrued compensation was settled through the commitment to transfer 327,778 shares of VeriTeQ common stock (out of the 1,199,532 total shares of VeriTeQ common stock that are issuable to the Company upon the conversion of VeriTeQ’s Series C convertible preferred stock owned by the Company). The Series C conversion was completed on October 22, 2013. The VeriTeQ shares were valued at $1.80 (adjusted to reflect the 1 for 30 reverse split by VeriTeQ on October 22, 2013), which was a 21% discount to the closing bid price on September 30, 2013, to reflect liquidity discount and holding period restrictions. The closing bid price on the day of conversion was $2.28; on January 14, 2014 the closing bid price was $0.88.

 

Six members of Management participated in this conversion, including all four of the Company’s current board of directors and one of its former directors. The board and Management paticipated as follows:

 

Name

 

Position

 

Total

Liability

Converted($)

   

VeriTeQ

Shares

Transferred

   

Value of VeriTeQ Shares at

September 30,2013

   

Value of VeriTeQ Shares at

January 14, 2014

 

William J. Caragol

 

Chairman and Chief Executive Officer

  $ 10,000       5,556     $ 12,667     $ 4,889  

Michael E. Krawitz

 

Director

    285,500       158,611       361,633       139,578  

Jeffrey S. Cobb

 

Director

    75,000       41,667       95,000       36,667  

Barry Edelstein

 

Former Director

    109,500       60,833       138,700       53,533  

Ned L. Siegel

 

Director

    100,000       55,556       126,667       48,889  

Allison F. Tomek

 

SVP of Corporate Development

    10,000       5,556       12,667       4,889  

Total

  $ 590,000       327,778     $ 747,334     $ 288,445  

 

 
41

 

 

Subject to the Plan 413 shares of Series I Preferred Stock were issued in settlement of $413,000 of accrued compensation. The conversion price of the Series I shares was fixed at $0.036, which was the closing bid price on the day of conversion. The Series I preferred shares were issued to six members of the Company’s Management, including all four members of the current board of directors. The directors’ and management participation is detailed as follows:

 

Name

 

Position

 

Total

Liability

Converted($)

   

Preferred

Series I

Issued

   

Common

Shares

Issuable

Upon

Conversion

   

Total

Votes

 

William J. Caragol

 

Chairman and Chief Executive Officer

  $ 250,000       250       6,944,444       173,611,111  

Michael E. Krawitz

 

Director

    51,000       51       1,416,667       35,416,667  

Jeffrey S. Cobb

 

Director

    38,000       38       1,055,556       26,388,889  

Ned L. Siegel

 

Director

    14,000       14       388,889       9,722,222  

Lyle Probst

 

President, MFS

    40,000       40       1,111,111       27,777,778  

Allison F. Tomek

 

SVP of Corporate Development

    20,000       20       555,556       13,888,889  

Total

  $ 413,000       413       11,472,223       286,805,556  

 

The Series I Preferred Stock has voting rights equivalent to twenty-five votes per common share equivalent. As of January 14, 2014, the Series I Preferred Stock, inclusive of the shares issued above and those issued subsequently, has the right to 889.4 million votes, or 95% of the total vote. As a result Management has voting control over the Company.

 

Equity Compensation Plan Information

 

The following table presents information regarding options and rights outstanding under equity our compensation plans as of December 31, 2013:

 

Plan Category(1)

 

(a)

Number of

securities to be

issued upon

exercise of

outstanding

options,

warrants and

rights

   

(b)

Weighted-

average

exercise price

per share of

outstanding

options,

warrants and

rights

   

(c)

Number of

securities

remaining

available for

future issuance

under equity

compensation

plans

(excluding

securities

reflected in

column (a))

 
                         

Equity compensation plans approved by security holders

    406,732     $ 2.83       107,888  

Equity compensation plans not approved by security holders(2)

    1,002,667     $ 0.37        

Total

    1,409,399     $ 2.83       107,888  

 

 

(1)

A narrative description of the material terms of our equity compensation plans is set forth in Note 6 to our consolidated financial statements for the year ended December 31, 2012.

 

 

(2)

We have made grants outside of our equity plans and have outstanding warrants exercisable for 3,085,620 shares of our common stock. These warrants were granted as an inducement for financing or for the rendering of consulting services.

 

 
42

 

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth certain information known to us regarding beneficial ownership of shares of our common stock as of January 14, 2014 by:  

 

 

each of our directors;

 

 

each of our named executive officers;

 

 

all of our executive officers and directors as a group; and

 

 

each person, or group of affiliated persons, known to us to be the beneficial owner of more than 5% of our outstanding shares of common stock.

 

Beneficial ownership is determined in accordance with the rules and regulations of the SEC and includes voting and investment power with respect to the securities. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of December 13, 2013 are deemed outstanding. Such shares, however, are not deemed outstanding for purposes of computing the percentage ownership of any other person. To our knowledge, except as indicated in the footnotes to this table and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of our common stock shown opposite such person’s name. The percentage of beneficial ownership is based on 41,976,997 shares of our common stock outstanding as of December 13, 2013. Unless otherwise noted below, the address of the persons and entities listed in the table is c/o PositiveID Corporation, 1690 South Congress Avenue, Suite 201, Delray Beach, Florida 33445. As a result of the voting rights associated with the Company’s 413 shares of Series I Preferred Stock, the named executive officers and directors have the right to 245.1 million votes as the result of their Series I holdings. The percentage of voting rights in the table below assumes that all Series I shares held by directors and named officers are voted in any instance requiring shareholder vote.

 

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

 

Name and Address of Beneficial Owner

 

Number of

Shares

Beneficially

Owned (#)

   

Percent of

Outstanding

Shares (%)

   

Percent of Voting Rights (%)

 

Five Percent Stockholders:

                       

William J. Caragol (1)

    24,280,385       33.5 %     60.4

%

Ironridge Global Technology Co., a division of Ironridge Global IV, Ltd. (2)

    4,974,903       9.9 %     9.9

%

                         

Named Executive Officers and Directors:

                       

William J. Caragol (1)

    24,280,385       33.5 %     60.4

%

Jeffrey S. Cobb (3)

    2,688,800       5.2 %     5.6

%

Michael E. Krawitz (4)

    3,102,453       6.0 %     6.6

%

Ned L. Siegel (5)

    2,065,043       4.0 %     3.8

%

Executive Officers and Directors as a group (4 persons)(6)

    32,136,681       41.0 %     76.3 %

(1)

Mr. Caragol beneficially owns 24,280,385 shares, which includes 12,000 shares issuable upon the exercise of warrants and shares issuable upon the exercise of stock options that are currently exercisable or exercisable within 60 days of January 14, 2014. Mr. Caragol has sole voting power over 1,651 ,916 shares of our common stock. Mr. Caragol has sole dispositive power over 225,000 shares of our common stock. Mr. Caragol lacks dispositive power over 1,426,916 shares which are restricted as to transfer until January 1, 20I5 (200,000 shares), and January 1, 2016 (1,226,916 shares). Mr. Caragol owns 631 shares of Series I preferred stock, which may convert to 22,616,469 shares of common stock. The Series I preferred stock vests on January 1, 2016.

(2)

Ironridge Global Partners, LLC, or IGP, and IGP's managing members Brendan T. O'Neil, Richard H. Kreger, John C. Kirkland and Keith Coulston may be deemed to beneficially own shares of common stock beneficially owned by Ironridge Global IV, Ltd., or IV, and shares of common stock beneficially owned by Ironridge Global III, LLC, or III, including shares issuable to III upon conversion of the Series F Preferred Stock. The address of the principal business office of IV is Harbour House, 2nd Floor, Waterfront Drive, P.O. Box 972, Road Town, Tortola, British Virgin Islands VGlliO. The address of the principal business office of IGP, III, and Messrs. O'Neil, Kreger and Coulston is 425 California Street, Suite 1010, San Francisco, California 94104. The address of the principal business office of Mr. Kirkland is 88I Alma Real Drive, Suite 305, Los Angeles, California 90272. Voting and dispositive power with respect to the shares owned by IV is exercised by David Sims and Peter Cooper, Directors. Voting and dispositive power with respect to shares of our common stock owned by III is exercised by Mr. O'Neil and Mr. Coulston. However, for so long as III or IV or any of their affiliates, or Ironridge, hold any shares of our common stock, they are prohibited from, among other actions: (1) voting any shares of our common stock owned or controlled by them, or soliciting any proxies or seeking to advise or influence any person with respect to any voting securities of the issuer; (2) engaging or participating in any actions or plans that relate to or would result in, among other things, (a) acquiring additional securities of us, alone or together with any other person, which would result in them collectively beneficially owning or controlling, or being deemed to beneficially own or control, more than 9.99% of our total outstanding common stock or other voting securities, (b) an extraordinary corporate transaction such as a merger, reorganization or liquidation, (c) a sale or transfer of a material amount of assets, (d) changes in our present board of directors or management, (e) material changes in our capitalization or dividend policy, (f) any other material change in our business or corporate structure, (g) actions which may impede the acquisition of control us by any person or entity, (h) causing a class of our securities to be delisted, (i) causing a class of our equity securities to become eligible for termination of registration; or (3) any actions similar to the foregoing. Each ofiGP and Messrs. O'Neil, Kreger, Kirkland and Coulston disclaims beneficial ownership or control of any of the securities listed above. IGP and Messrs. O'Neil, Kreger, Kirkland and Coulston directly own no shares of the issuer. However, by reason of the provisions of Rule 13d-3 of the Exchange Act, as amended, IGP or Messrs. O'Neil, Kreger, Kirkland and Coulston may be deemed to beneficially own or control the shares owned by III and IV. Messrs. O'Neil, Kreger and Kirkland are each managing directors ofiii and IV, and managing directors, members and 30% beneficial owners of IGP. Mr. Coulston is a director, member and IO"/o beneficial owner of IGP. IGP is a member and beneficial owner of III, and a stockholder and beneficial owner of IV.

For purposes of calculating the percent of class, we have assumed that there were a total of 49,798,381 shares of our common stock outstanding such that 4,974,903 shares beneficially owned would represent approximately 9.99% of the outstanding common stock after such issuance. The 9.99% ownership limitation does not prevent Ironridge from selling some of its holdings and then receiving additional shares. In this way, Ironridge could sell more than the 9.99% ownership limitation while never holding more than this limit. The Series F Preferred Stock has a provision precluding III from converting any shares of Series F Preferred Stock if such conversion would result in Ironridge being deemed to beneficially own or control more than 9.99% of our outstanding common stock. Subject to the foregoing overall limitation, shares include (I) 4,974,903 shares of common stock beneficially owned by Ironridge, (2) 61,478,357 shares of common stock issuable upon conversion of 750 shares of the Series F Preferred Stock, and (3) a number of shares of common stock issuable upon conversion of any additional shares of Series F Preferred Stock that we may choose to issue in lieu of cash as payment of the 7.65% dividends on the Series F Preferred Stock.

(3)

Includes 574,800 shares of our common stock and 37,750 shares of our common stock issuable upon the exercise of stock options that are currently exercisable or exercisable within 60 days of January 14, 2014. Mr. Cobb lacks dispositive power over 60,000 shares, which are restricted until January 1, 2016. Mr. Cobb owns 63 shares of Series I preferred stock, which may convert to 2,076,250 shares of common stock. The Series I preferred stock vests on January 1, 2016.

(4)

Includes 622,800 shares of our common stock and 36,000 shares of our common stock issuable upon the exercise of stock options that are currently exercisable or exercisable within 60 days of January 14, 2014. Mr. Krawitz lacks dispositive power over 100,000 shares, which are restricted until January 1, 2016. Mr. Krawitz owns 76 shares of Series I preferred stock, which may convert to 2,443,653 shares of common stock. The Series I preferred stock vests on January 1, 2016.

(5)

Includes 631,076 shares of our common stock and 36,000 shares of our common stock issuable upon the exercise of stock options that are currently exercisable or exercisable within 60 days of January 14, 2014. Mr. Siegel lacks dispositive power over 120,000 shares, which are restricted until January 1, 2016. Mr. Siegel owns 39 shares of Series I preferred stock, which may convert to 1,397,967 shares of common stock. The Series I preferred stock vests on January 1, 2016.

(6)

Includes shares of our common stock beneficially owned by current executive officers and directors and shares issuable upon the exercise of stock options that are currently exercisable or exercisable within 60 days of January 14, 2014, in each case as set forth in the footnotes to this table.

  

43 
 

 

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Since the beginning of our fiscal year 2011, there has not been, and there is not currently proposed any transaction or series of similar transactions in which the amount involved exceeded or will exceed the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years and in which any related person, including any director, executive officer, holder of more than 5% of our capital stock during such period, or entities affiliated with them, had a material interest, other than as described in the transactions set forth below.

 

Related Party Transactions

 

VeriTeQ Transaction

 

On January 11, 2012, VeriTeQ Acquisition Corporation, or VeriTeQ, which is owned and controlled by our former chairman and chief executive officer, Scott Silverman, purchased all of the outstanding capital stock of PositiveID Animal Health, or Animal Health, in exchange for a secured promissory note in the amount of $200,000, or the Note, and 4 million shares of common stock of VeriTeQ representing a 10% ownership interest, to which no value was ascribed. The Note accrues interest at 5% per annum. Payments under the Note were to begin on January 11, 2013 and are due and payable monthly, and the Note matures on January 11, 2015. The Note is secured by substantially all of the assets of Animal Health pursuant to a security agreement dated January 11, 2012, or the VeriTeQ Security Agreement. Mr. Caragol was a director of VeriTeQ Acquisition Corporation until July 5, 2013. Mr. Krawitz a director of the Company was a director of VeriTeQ Acquisition and continues as a director of VeriTeQ Corporation, its successor.

 

In connection with the sale, we entered into a license agreement with VeriTeQ dated January 11, 2012, or the Original License Agreement, which granted VeriTeQ a nonexclusive, perpetual, nontransferable, license to utilize our biosensor implantable radio frequency identification (RFID) device that is protected under United States Patent No. 7,125,382, “Embedded Bio Sensor System,” or the Patent, for the purpose of designing and constructing, using, selling and offering to sell products or services related to the VeriChip business, but excluding the GlucoChip or any product or application involving blood glucose detection or diabetes management. Pursuant to the Original License Agreement, we were to receive royalties in the amount of 10% on all gross revenues arising out of or relating to VeriTeQ’s sale of products, whether by license or otherwise, specifically relating to the Patent, and a royalty of 20% on gross revenues that are generated under the Development and Supply Agreement between us and Medical Components, Inc., or Medcomp, dated April 2, 2009, to be calculated quarterly with royalty payments due within 30 days of each quarter end. The total cumulative royalty payments under the agreement with Medcomp will not exceed $600,000.

 

We also entered into a shared services agreement with VeriTeQ on January 11, 2012, or the Shared Services Agreement, pursuant to which we agreed to provide certain services to VeriTeQ in exchange for $30,000 per month. The term of the Shared Services Agreement commenced on January 23, 2012. The first payment for such services is not payable until VeriTeQ receives gross proceeds of a financing of at least $500,000. On June 25, 2012, the Shared Services Agreement was amended, pursuant to which all amounts owed to us under the Shared Services Agreement as of May 31, 2012 were converted into shares of common stock of VeriTeQ. In addition, effective June 1, 2012, the level of shared services was decreased and the monthly charge for the shared services under the Shared Services Agreement was reduced from $30,000 to $12,000. Furthermore, on June 26, 2012, the Original License Agreement was amended pursuant to which the license was converted from a nonexclusive license to an exclusive license, subject to VeriTeQ meeting certain minimum royalty requirements as follows: 2013 $400,000; 2014 $800,000; and 2015 and thereafter $1,600,000.

 

On August 28, 2012, we entered into an Asset Purchase Agreement with VeriTeQ, or the VeriTeQ Asset Purchase Agreement, whereby VeriTeQ purchased all of the intellectual property, including patents and patents pending, related to our embedded biosensor portfolio of intellectual property. Under the VeriTeQ Asset Purchase Agreement, we are to receive royalties in the amount of ten percent (10%) on all gross revenues arising out of or relating to VeriTeQ’s sale of products, whether by license or otherwise, specifically relating to the embedded biosensor intellectual property, to be calculated quarterly with royalty payments due within 30 days of each quarter end. In 2012, there are no minimum royalty requirements. Minimum royalty requirements thereafter, and through the remaining life of any of the patents and patents pending, are identical to the minimum royalties due under the Original License Agreement.

 

44 
 

 

 

Simultaneously with the VeriTeQ Asset Purchase Agreement, we entered into a license agreement with VeriTeQ which granted us an exclusive, perpetual, transferable, worldwide and royalty-free license to the Patent and patents pending that are a component of the GlucoChip in the fields of blood glucose monitoring and diabetes management. In connection with the VeriTeQ Asset Purchase Agreement, the Original License Agreement, as amended June 26, 2012, was terminated. Also on August 28, 2012, the VeriTeQ Security Agreement was amended, pursuant to which the assets sold by us to VeriTeQ under the VeriTeQ Asset Purchase Agreement and the related royalty payments were added as collateral under the Security Agreement.

 

On August 28, 2012, the Shared Services Agreement was further amended, pursuant to which, effective September 1, 2012, the level of services provided was decreased and the monthly charge for the shared services under the Shared Services Agreement was reduced from $12,000 to $5,000. On April22, 2013, the Company entered into a non-binding letter agreement with VeriTeQ in which the Company agreed to provide up to an additional $60,000 of support during April and May 2013.

 

The new agreements and amendments to existing agreements between the Company and VeriTeQ Acquisition Corporation on August 28, 2012 were entered into to transfer ownership of the underlying intellectual property, primarily patents, to VeriTeQ, with a license back to the Company for the one application that the Company retained. The royalty rates set in the original license were maintained and the rates in the Shared Services Agreement, as amended, were adjusted to reflect a decreased level of support between the two companies. The intent of these agreements and amendments was to better position VeriTeQ Acquisition Corporation for a third party capital transaction and were negotiated at arm's length. No additional financial consideration was conveyed in conjunction with these agreements and amendments. It was the Company's intent in its transactions with VeriTeQ Corporation to maximize and monetize its returns for the benefit of the Company.

 

On July 8, 2013, the Company entered into a Letter Agreement with VeriTeQ, to amend certain terms of several agreements between PositiveID and VeriTeQ. The Letter Agreement amended certain terms of the Shared Services Agreement entered into between PositiveID and VeriTeQ on January 11, 2012, as amended; the Asset Purchase Agreement entered into on August 28, 2012, as amended; and the Secured Promissory Note dated January 11, 2012.  The Letter Agreement defines the conditions of termination of the Shared Services Agreement, including payment of the approximate $290,000 owed from VeriTeQ to PositiveID, the elimination of minimum royalties payable to PositiveID under the Asset Purchase Agreement, as well as certain remedies if VeriTeQ fails to meet certain sales levels, and to amend the Note, which has a current balance of $228,000, to include a conversion feature under which the Note may be repaid, at VeriTeQ’s option, in equity in lieu of cash. The agreements entered into on July 8, 2013 were negotiated in conjunction with VeriTeQ Acquisition Corporation’s merger transaction with Digital Angel Corporation, resulting in a public company now called VeriTeQ Corporation. The terms of the agreements were made to benefit both the Company and VeriTeQ. The Company benefitted as its equity interest in VeriTeQ became an equity interest in a public company, allowing future realization of the Company’s holdings. No additional financial consideration was conveyed in conjunction with these agreements and amendments. The changes were also a condition to closing of the merger agreement set by Digital Angel, VeriTeQ’s merger partner.     

 

During October 2013 VeriTeQ arranged a financing with a group of eight buyers (the “Buyers”). In conjunction with that transaction the Buyers offered the Company a choice of either selling its interest in VeriTeQ, including 871,754 shares and its convertible promissory note (which had a balance of $203,694 at the time of the transaction), which was convertible into 135,793 shares of VeriTeQ stock, for $750,000, or alternatively, to lock up its shares for a period of one year. The Board of Directors of the Company considered a number of factors, including the Company’s liquidity and access to capital, and the prospects for return on the VeriTeQ shares in twelve months. The Board concluded that it was in the best interest of Company to sell its interest in VeriTeQ to the Buyers.

 

As a result, on November 8, 2013 the Company entered into a letter agreement (the “November Letter Agreement”) with VeriTeQ and on November 13, 2013, the Company entered into a Stock Purchase Agreement (“SPA”) with the Buyers. On November 13, 2013 VeriTeQ entered into a financing transaction with Hudson Bay Master Fund Ltd. (“Hudson”) and other participants, including most of the Buyers.

 

Pursuant to the SPA, the Company sold its remaining shares of VeriTeQ common stock (871,754) and the convertible note owed from VeriTeQ to the Company (convertible into 135,793 shares of VeriTeQ common stock). Total proceeds from the sale were $750,000, which were received by November 18, 2013. On November 13, 2013, the aggregate market value of the 871,754 shares of VeriTeQ common stock was $1.8 million, and the aggregate market value of 135,793 shares of Common Stock underlying the promissory note was $276,000. As of January 14, 2014 the VeriTeq shares an