rm 10-Q for POSITIVEID CORP
13-Aug-2015
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed financial statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q as well as our Annual Report on Form 10-K for the year ended December 31, 2014.
Overview
PositiveID develops molecular diagnostic systems for bio-threat detection and rapid medical testing. The Company's M-BAND (Microfluidic Bio-agent Autonomous Networked Detector) system is a fully automated airborne bio-threat detection system developed for the homeland defense industry, to detect biological weapons of mass destruction. PositiveID is also developing the Firefly Dx, an automated pathogen detection systems for rapid diagnostics, both for clinical and point of need applications.
Since the inception of the Company's wholly owned subsidiary, and including periods prior to acquisition of MFS, the Company has received over $50 million in government grants and contract work for the U.S. Department of Defense ("DoD"), DHS, the Federal Bureau of Investigation, the National Aeronautics and Space Administration, the Defense Advanced Research Projects Agency and industrial clients. We hold a substantial portfolio of 18 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 through 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 next generation BioWatch program, which has been estimated to be a $3 billion program; (2) identify a research and development contract to complete the development of our clinical/point-of-need diagnostic platform, the Firefly Dx system; and (3) reduce our operating costs to focus solely on those initiatives. The results of these efforts continue on an ongoing basis through 2015.
Subsequent to acquiring MFS in 2011, the Company has: (1) sold substantially all of its non-core assets; (2) drastically reduced its general and administrative costs and cash burn; (3) entered into a license agreement and teaming agreement with Boeing for its M-BAND system in the fourth quarter of 2012; (4) entered into exclusive licenses for its iglucose and GlucoChip technologies. The Company will continue to either seek strategic partners or acquirers for its glucose breath detection technology. Further, the Company will continue to seek additional products and/or companies to acquire that fit with its strategic direction.
Results of Operations
Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014
Revenue
We reported $51,000 and $420,000 revenue from continuing operations for the three months ended June 30, 2015 and 2014. On March 28, 2014 the Company entered into an agreement, in the form of a purchase order, from UTC Aerospace Systems ("UTAS") to support a contract for the DoD. Pursuant to the agreement, work commenced in April 2014 and was completed in early 2015. In July 2014 the Company received an additional purchase order to increase the scope and value of the agreement. The terms of this fixed price agreement include a total value of $1,008,000 to PositiveID, paid in monthly installments between April and October, 2014, with the work completed in early 2015. In October 2014 the Company also entered into a contract related to the DHS SenseNet program. The Phase I contract was completed during the first half of 2015 and is worth $113,400 to the Company.
The Company continues to pursue additional contracts in advance of the completion of the Firefly Dx development and commercial launch.
The Company has deferred the $2.5 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.
Direct Labor
Direct labor consists of compensation expense for employees and consultants working directly on the Company's revenue producing agreements. Direct labor was $46,000 and $94,000 for three months ended June 30, 2015 and 2014, respectively, related to the contracts discussed above, on which work began in April 2014.
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of compensation for employees in executive, sales, marketing and operational functions, including finance and accounting and corporate development. Included in selling, general and administrative expense is all non-cash, equity based compensation. Other significant costs include depreciation and amortization, professional fees for accounting and legal services, consulting fees and facilities costs.
Selling, general and administrative expense increased by $323,000, or 40%, for the three months ended June 30, 2015 compared to the three months ended June 30, 2014. This increase was primarily the result of an increase in Company marketing expenses. Management expects these marketing costs to decrease in the second half of 2015.
Research and Development
Our research and development expense consists primarily of labor (both internal and contract) and materials costs associated with various development projects, including testing, developing prototypes and related expenses. Our research and development costs include payments to our development partners and acquisition of in process research and development. We seek to structure our research and development on a project basis to allow the management of costs and results on a discrete short term project basis. This may result in quarterly expenses that rise and fall depending on the underlying project status. We expect this method of managing projects to allow us to minimize our firm fixed commitments at any given point in time.
Research and development expense increased by approximately $179,000, or 279%, for the three months ended June 30, 2015 compared to the three months ended June 30, 2014. The increase was primarily attributable to the increase in labor, and engineering costs related to the development of Firefly Dx product.
Interest and Other Expense (net)
Interest expense (net) increased by approximately $0.6 million or 124%, for the three months ended June 30, 2015 compared to the three months ended June 30, 2014. The increase was primarily attributed to the amortization of fair value premiums and debt discounts related to the increased level of borrowing, through convertible notes, the three months ended June 30, 2015. The amortization of fair value premiums and debt discounts are non-cash income/expense items.
Beneficial Conversion Dividend on Preferred Stock
Beneficial conversion dividend on preferred stock for the three months ended June 30, 2015 and 2014 was $nil and $84,000, respectively. This amount in is a non-cash charge. The decrease is primarily the result of conversion all Series F preferred outstanding during 2014.
Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014
Revenue
We reported $182,000 and $420,000 revenue from continuing operations for the six months ended June 30, 2015 and 2014. On March 28, 2014 the Company entered into an agreement, in the form of a purchase order, from UTAS to support a contract for the DoD. Pursuant to the agreement, work commenced in April 2014 and was completed in early 2015. In July 2014 the Company received an additional purchase order to increase the scope and value of the agreement. The terms of this fixed price agreement include a total value of $1,008,000 to PositiveID, paid in monthly installments between April and October, 2014 with the work completed in early 2015. In October 2014 the Company also entered into a contract related to the DHS SenseNet program. The Phase I contract was completed during the first half of 2015 and is worth $113,400 to the Company.
The Company continues to pursue additional contracts in advance of the completion of the Firefly Dx development and commercial launch.
The Company has deferred the $2.5 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.
Direct Labor
Direct labor consists of compensation expense for employees and consultants working directly on the Company's revenue producing agreements. Direct labor was $148,000 and $94,000 for six months ended June 30, 2015 and 2014, respectively, related to the contracts discussed above, on which work began in April 2014.
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of compensation for employees in executive, sales, marketing and operational functions, including finance and accounting and corporate development. Included in selling, general and administrative expense is all non-cash, equity based compensation. Other significant costs include depreciation and amortization, professional fees for accounting and legal services, consulting fees and facilities costs.
Selling, general and administrative expense increased by $151,000, or 5%, for the six months ended June 30, 2015 compared to the six months ended June 30, 2014. This increase was primarily the result of an overall increase in Company marketing expenses. Management expects these marketing costs to decrease in the second half of 2015.
Research and Development
Our research and development expense consists primarily of labor (both internal and contract) and materials costs associated with various development projects, including testing, developing prototypes and related expenses. Our research and development costs include payments to our 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 $453,000, or 526%, for the six months ended June 30, 2015 compared to the six months ended June 30, 2014. The increase was primarily attributable to the increase in labor, and engineering costs related to the development of Firefly Dx product.
Interest and Other Expense (net)
Interest expense (net) increased by approximately $1.5 million or 172%, for the six months ended June 30, 2015 compared to the six months ended June 30, 2014. The increase was primarily attributed to the amortization of fair value premiums and debt discounts related to the increased level of borrowing, through convertible notes, the six months ended June 30, 2015. The amortization of fair value premiums and debt discounts are non-cash income/expense items.
Beneficial Conversion Dividend on Preferred Stock
Beneficial conversion dividend on preferred stock for the six months ended June 30, 2015 and 2014 was $nil and $480,000, respectively. This amount in is a non-cash charge. The decrease is primarily the result of conversion all Series F preferred outstanding during 2014.
Liquidity and Capital Resources
As of June 30, 2015, cash and cash equivalents totaled $672,000 compared to cash and cash equivalents of $145,000 at December 31, 2014.
Cash Flows from Operating Activities
Net cash used in operating activities totaled approximately $2.3 million and $1.0 million during the six months ended June 30, 2015 and 2014, respectively, primarily to fund operating losses. This increase in cash used in operating activities was primarily the result of efforts to reduce current liabilities and an increase in operating costs related to the development of Firefly Dx product and Company marketing.
Cash Flows from Investing Activities
Net cash provided by investing activities totaled approximately $0.2 million and nil during the six months ended June 30, 2015 and 2014, respectively. These cash proceeds primarily resulted from the net cash inflows from the sales of the Company's warrant position in VeriTeQ.
Cash Flows from Financing Activities
Financing activities provided cash of approximately $2.7 million and $1.0 million during the six months ended June 30, 2015 and 2014, respectively, primarily related to proceeds from the issuance of convertible notes and debentures.
Financial Condition
As of June 30, 2015, we had a working capital deficiency of approximately $10.1 million and an accumulated deficit of approximately $139.6 million, compared to a working capital deficit of approximately $8.1 million and an accumulated deficit of approximately $132.8 million as of December 31, 2014. The decrease in working capital was primarily due to operating losses for the period, offset by cash received from capital raised through convertible debt financings
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 12 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.
On November 25, 2014 the Company closed a financing transaction by entering into a Securities Purchase Agreement with an accredited investor for an aggregate subscription amount of $4,000,000 (the "Purchase Price"). Pursuant to the Securities Purchase Agreement, the Company shall issue a series of 4% Original Issue Discount Senior Secured Convertible Promissory Note (collectively, the "Notes") to the Purchaser. The Purchase Price will be paid in eight equal monthly payments of $500,000. Each individual Note will be issued upon payment and will be amortized beginning six months after issuance, with amortization payments being 1/24th of the principal and accrued interest, made in cash or common stock at the option of the Company, subject to certain conditions contained in the Securities Purchase Agreement. The Company also reimbursed the Purchaser $25,000 for expenses from the proceeds of the first tranche and the Purchaser's counsel $25,000 from the first tranche. The use of proceeds from this financing are intended for the completion of the breadboard prototype of the Company's Firefly Dx cartridge, restructuring of the Company's existing convertible debt, and general working capital. Through June 30, 2015, the Company has received all eight tranches under the SPA of the Note, with a maturity dates between June 26, 2016 and December 29, 2016, pursuant to a convertible note. Under the agreement the Company received $3,540,600, which was net of Purchaser's expenses and legal fees and a 4% original issue discount. During 2015 and 2016, we will need to raise additional capital, including capital not currently available under our existing financing agreements in order to execute our business plan.
The Company intends to continue to access capital to provide funds to meet its working capital requirements for the near-term future. In addition and if necessary, the Company could reduce and/or delay certain discretionary research, development and related activities and costs. However, there can be no assurances that the Company will be able to negotiate additional sources of equity or credit for its long term capital needs. The Company's inability to have continuous access to such financing at reasonable costs could materially and adversely impact its financial condition, results of operations and cash flows, and result in significant dilution to the Company's existing stockholders. The Company's consolidated financial statements do not include any adjustments relating to recoverability of assets and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
Off-Balance Sheet Arrangements
