News Column

POSITIVEID CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 14, 2014

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q as well as our Annual Report on Form 10-K for the year ended December 31, 2013.

Overview



PositiveID develops molecular diagnostic systems for bio-threat detection and rapid medical testing. The Company 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. PositiveID is also developing automated pathogen detection systems for rapid diagnostics, both for clinical and point of need applications (the Firefly Dx).

Since its inception, and prior to acquisition, PositiveID, through its wholly-owned subsidiary MFS, has received over $50 million in government grants and contract work for the Department of Defense, 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 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 over five years; (2) identify a research and development contract to complete the development of our clinical/point of demand diagnostic platform, the Firefly system; 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; (3) drastically reduced its operating cost and cash burn; (4) entered into a license agreement and teaming agreement with Boeing for its M-BAND system in the fourth quarter of 2012; (5) executed into an exclusive license for its iglucose technology. The Company will continue to either seek strategic partners or acquirers for its GlucoChip and its glucose breath detection system.

Results of Operations



Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Revenue



We reported revenue of $420,000 and nil for the three months ended June 30, 2014 and 2013, respectively. 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 U.S. Department of Defense ("DoD"). Pursuant to the agreement, work commenced in April 2014 and is expected to be completed in October of 2014. 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.

This agreement will support the DoD Joint United States Forces Korea Portal and Integrated Threat Recognition ("JUPITR") Program, which is intended to detect biological threats in order to protect our nation's warfighters and allies. Under the JUPITR program the DoD will test and evaluate PositiveID's biological detection and identification product, M-BAND. The assessment will baseline performance, reliability, maintainability, ease of use, and cost of operation to provide the "best of breed" and most affordable options for the U.S. Army and U.S. Air Force.

We entered into the Boeing License Agreement in December 2012. 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 $94,000 and nil for the three months ended June 30, 2014 and 2013, respectively, related to the contract discussed above, on which work began in April 2014.

24



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 decreased by $481,000, or 37%, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. This decrease was primarily the result of an adjustment to the contingent earn-out liability, increased direct labor, and reduction in overhead expenses for the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

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 $96,000, or 60%, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The decrease was primarily attributable to the increase in direct labor and the timing of the development expenses related to our molecular diagnostic products.

Interest and Other Expense (net)

Interest expense (net) increased by approximately $398,000 or 311%, for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The increase was primarily attributed to the fair value premiums recorded to increase the balance of a convertible notes, in the three months ended June 30, 2014.

Beneficial Conversion Dividend on Preferred Stock

Beneficial conversion dividend on preferred stock for the three months ended June 30, 2014 and 2013 was approximately $84,000 and $1.1 million, respectively. This amount in both periods is a non-cash charge. The decrease of $1.0 million is primarily the result of decreased Series F preferred conversions during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Revenue



We reported revenue of $420,000 and nil for the six months ended June 30, 2014 and 2013, respectively. 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 is expected to be completed in October of 2014. 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.

This agreement will support the DoD JUPITR Program, which is intended to detect biological threats in order to protect our nation's warfighters and allies. Under the JUPITR program the DoD will test and evaluate PositiveID's biological detection and identification product, M-BAND. The assessment will baseline performance, reliability, maintainability, ease of use, and cost of operation to provide the "best of breed" and most affordable options for the U.S. Army and U.S. Air Force.

We entered into the Boeing License Agreement in December 2012. 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 $94,000 and nil for the six months ended June 30, 2014 and 2013, respectively, related to the contract discussed above, on which work began in April 2014.

25



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 decreased by $114,000, or 4%, for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. This decrease was primarily the result of reduction in overhead expenses for the six months ended June 30, 2014 compared to the six months ended June 30, 2013.

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 $245,000, or 74%, for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. The decrease was primarily attributable to the increase in direct labor and the timing of the development expenses related to our molecular diagnostic products.

Interest and Other Expense (net)

Interest expense (net) increased by approximately $564,000 or 201%, for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. The increase was primarily attributed to the fair value premiums recorded to increase the balance of convertible notes, and issuance of Series F Preferred Stock as liquidating damages in the six months ended June 30, 2014.

Beneficial Conversion Dividend on Preferred Stock

Beneficial conversion dividend on preferred stock for the six months ended June 30, 2014 and 2013 was approximately $0.5 and $4.5 million, respectively. This amount in both periods is a non-cash charge. The decrease of $4.0 million is primarily the result of decreased Series F preferred conversions during the three months ended June 30, 2014 as compared to the six months ended June 30, 2013.

Liquidity and Capital Resources

As of June 30, 2014, cash and cash equivalents totaled $183,000 compared to cash and cash equivalents of $165,000 at December 31, 2013.

Cash Flows from Operating Activities

Net cash used in operating activities totaled approximately $1.0 million and $0.9 million during the six months ended June 30, 2014 and 2013, respectively, primarily to fund operating losses. This increase in cash used in operating activities was primarily the result of the Company's efforts to reduce current liabilities.

Cash Flows from Investing Activities

Net cash used in investing activities was not significant for the six months ended June 30, 2014 or 2013.

Cash Flows from Financing Activities

Financing activities provided cash of approximately $1.1 million and $0.8 million during the six months ended June 30, 2014 and 2013, respectively, primarily related to proceeds from the issuance of convertible notes and the sale of Series F Preferred Stock.

26 Financial Condition



As of June 30, 2014, we had a working capital deficiency of approximately $6.8 million and an accumulated deficit of approximately $128.5 million, compared to a working capital deficit of approximately $5.6 million and an accumulated deficit of approximately $124.6 million as of December 31, 2013. 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 2013 we raised approximately $1.4 million, net of principal repayments on a debenture, from the issuance of convertible preferred stock, common stock under an equity line financing, and convertible debt. Additionally, in 2013 we collected $1.5 million under our license agreement with Boeing. For the six months ended June 30, 2014 we have raised approximately $1.1 million, net, from convertible debt and preferred stock issuances.

Additionally, on March 28, 2014 the Company entered into an agreement, amended and augmented in July 2014, 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 is expected to be completed in October of 2014. 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.

During 2014, we will need to raise additional capital, including capital not currently available under our current financing agreements in order to execute our business plan.

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 from past financing sources 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.

Off-Balance Sheet Arrangements

None.


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Source: Edgar Glimpses


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