Maybe that will explain a little:
On August 25, 2016, PositiveID completed the acquisition and entered into an agreement with the Sanomedics and Thermomedics (the “August Agreement”), which amends certain terms of the Purchase Agreement and terminates the Control Agreement. The amendments to the Purchase Agreement include: (a) that any legal expense or losses incurred by PositiveID after June 30, 2016 related to the Exergen litigation shall have the effect of reducing any future earnouts that may be owed to the Sanomedics, dollar for dollar; (b) PositiveID and the Sanomedics also agreed to settle the final closing net working capital adjustment through a reduction of the Series J Preferred Stock shares to be released from escrow. As a result, the 125 shares of Preferred Series J stock originally issued shall be released from escrow as follows: 71 shares to the Sanomedics and 54 shares returned to the Company’s treasury.
As of August 25, 2016 and September 30, 2016, the Series J preferred stock consideration has a fair value of $71,000, and the estimated fair value of the contingent consideration was nil based on the fair value analysis as of September 30, 2016.
In connection with the acquisition, the Company issued a Convertible Promissory Note to Keith Houlihan, the former CEO of the Sanomedics and President of Thermomedics (the “Holder”), dated August 25, 2016 in the aggregate principal amount of $75,000 (the “Note”). The Note bears an interest rate of 5%, and is due and payable before or on August 25, 2017. The Note may be converted by the Holder at any time after February 28, 2017 into shares of Company’s common stock at a price equal to a 10% discount to the average of the three lowest daily VWAPs (volume weighted average price) of the Company’s common stock as reported on the OTCQB for the 10 trading days prior to the day the Holder requests conversion. Any conversion will be limited by: (i) Holder may not make more than one conversion every ten trading days, and (ii) the amount of conversion shares at any conversion may not be more than the total number of shares of Common Stock traded over the ten trading days preceding the conversion notice multiplied by 5%. The Note is a long-term debt obligation that is material to the Company. The Note may be prepaid in accordance with the terms set forth in the Note. The Note also contains certain representations, warranties, and events of default including if the Company fails to pay when due any amount owed on the Note, and increases in the amount of the principal and interest rates under the Note in the event of such defaults. In the event of default, at the option of the Holder and in the Holder’s sole discretion, the Holder may consider the Note immediately due and payable. The Company recorded this expense of $75,000 in the change in acquisition obligations in the accompanying consolidated statement of operations.
In consideration for the Note, the Company entered into a Consent and Release by and between the Company, Thermomedics, the Holder and Vitacura LLC, a Florida limited liability corporation (“Vitacura”), which is wholly owned by the Holder (the “Release”), pursuant to which the Holder and Vitacura agreed to release the Company and Thermomedics from any and all causes of action.
In connection with the acquisition, additional earn-out payments of up to $750,000 for each of the fiscal years ending December 31, 2016 and 2017 may be earned by the Thermomedics if certain revenue thresholds are met as described in the Purchase Agreement. Such earn-out payments, if any, will consist of 25% in cash, up to $187,000 and 75% and in shares of preferred stock of the Company, up to 563 shares of Preferred Stock, for each of the fiscal years ending December 31, 2016 and 2017, respectively. The Company recorded a contingent earn-out liability of $184,000, as a non-current liability, as reflected in the consolidated as of December 31, 2015. The Company adjusted the contingent earn-out liability to its fair value during the three months ended September 30, 2016. As of September 30, 2016, the estimated value of the earnout liability was nil.
Accordingly, the Company reduced other assets by $12,000, reduced goodwill by $17,000, reduced Preferred Series J by $54,000, reduced the contingent earn-out liability by $184,000 and recognized a net gain of $209,000 included in change in acquisition obligations in the accompanying consolidated statement of operations.
The Company acquired Thermomedics for a number of reasons including the quality of its Caregiver® product, its prospects for sales and profit growth, its management team strengths in sales and marketing FDA cleared medical devices, and their regulatory experience.
Under the acquisition method of accounting, the estimated purchase price of the acquisitions was allocated to net tangible and identifiable intangible assets and liabilities of Thermomedics and ENG assumed based on their estimated fair values. The estimated fair values of certain assets and liabilities have been estimated by management and are subject to change upon the finalization of the fair value assessments.
Thermomedics ENG
Assets acquired:
Net tangible assets $ 35 $ 2,584
Customer contracts and relationships 240 238
Other assets 12 7
Patents and other intellectual property 178 -
Goodwill 108 200
573 3,029
Liabilities acquired:
Current liabilities (89 ) (2,116 )
Long term debt - (1 )
Total estimated purchase price $ 484 $ 912
14
POSITIVEID CORPORATION
Notes to the Condensed Consolidated Financial Statements
September 30, 2016
(Unaudited)
Contingent earn-out liability for Thermomedics and ENG as of September 30, 2016 is as follows (in thousands):
Contingent Earn-Out Liability (In thousands):
Balance of contingent earn-out liability as of December 31, 2015 $ 307
Payment during the nine months ended September 30, 2016 (39 )
Change in FV of liability during the nine months ended September 30, 2016 (268 )
Balance of contingent earn-out liability as of September 30, 2016 $ —
The following supplemental unaudited pro forma information assumes that these acquisitions had occurred as of January 1, for the nine months ended September 30, 2015 (in thousands except per share data):
For Nine Months Ended
September 30, 2015
(unaudited)
Revenue $ 6,462
Net loss $ (4,500 )
Loss per common share – basic and diluted $ (1.25 )
The unaudited pro forma financial information is not necessarily indicative of the results that would have occurred if these acquisitions had occurred on the dates indicated or that may result in the future.
