Akers Biosciences, Inc. (Q) — Q1 2018 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2018 and was signed July 13, 2018. Akers develops and sells rapid diagnostic and health-and-wellness tests. The filing was delayed while the company evaluated accounting and reporting issues and filed alongside amended 2017 reports.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $302,475 | $667,250 |
| Gross profit / margin | $4,975 / 1.6% | $408,529 / 61.2% |
| Operating loss | $(1,893,457) | $(1,362,153) |
| Net loss | $(1,859,991) | $(1,349,270) |
| Net loss per share, basic and diluted | $(0.03) | $(0.19) |
| Operating cash flow | $(1,800,372) | $(1,561,663) |
- Revenue fell 55% year over year; PIFA revenue declined 54% to $259,983 and MPC revenue declined 78% to $18,950. One customer represented 79% of quarterly revenue.
- At March 31, cash was $647,267 and marketable securities were $8,679,010, totaling $9,326,277. Working capital was $9,784,223; total liabilities were $1,379,538, with no debt shown on the balance sheet.
- Cash increased $208,835 during the quarter: $5,717,325 of net warrant-exercise proceeds more than offset operating cash use and investing outflows. The company invested $3,972,386 in marketable securities and spent $37,827 on property and equipment.
- Shareholders’ equity was $11,417,245 and accumulated deficit was $106,705,838. Common shares outstanding rose from 44.2 million at year-end to 86.4 million at March 31, principally following warrant exercises and conversion of preferred stock. The filing reports 94.1 million shares outstanding as of July 13.
Material changes and management commentary
- Lower PIFA antigen-extraction yields constrained production and caused backorders. Management was working with its supplier and evaluating alternative suppliers and processes; validation and stability testing remained to be completed.
- Management expects operating losses to continue in the near term. It plans to focus on product development and commercialization, distribution relationships, clinical and regulatory work, and cost controls. Expected 2018 capital expenditures were approximately $250,000.
- Management stated that working capital should cover estimated needs for at least 12 months. However, the risk factors also say historical operating cash generation has not covered expenses, additional financing may be necessary, and those conditions raise substantial doubt about the company’s ability to continue as a going concern.
- The company withdrew its initial 510(k) application for the PIFA Chlamydia assay in May 2018 and was evaluating whether and when to resubmit. NovoTek had not obtained required reimbursement approvals for PIFA products in China or Poland, and the company did not expect revenue from those markets until approvals were obtained.
- The company disclosed material errors in previously issued 2017 financial statements involving revenue recognition, timely expense recording, and inventory valuation. It concluded disclosure controls were ineffective and described remediation plans, including additional qualified personnel, revised revenue controls, transaction monitoring, and training.
Risks, contingencies, and unusual items
- NASDAQ had cited late filings and a separate shareholder-approval violation relating to amendments to the 2013 equity plan. The filing says the company believed its filings addressed the filing issue; NASDAQ approved a remediation plan for the equity-plan matter, with a December 10, 2018 deadline to regain compliance. The plan included shareholder ratification and restrictions on certain plan shares and options.
- Two securities class actions alleged misleading disclosures concerning 2017 revenue recognition and internal controls; other actions were threatened. A former executive had threatened a CEPA claim. The company had not accrued for litigation losses because outcomes could not be assessed.
- Pulse Health sought at least $500,000 and an injunction relating to OxiChek. The court dismissed its unfair-competition claims, ruled for Akers on some issues, and set other issues for trial in November 2018.
- Related-party items included $31,689 of ChubeWorkx royalties and $48,589 of R&D services from Medical Horizons, a company owned and operated by a leadership-team member’s spouse.
- Customer and receivables concentration, reliance on external and in some cases single-source suppliers, product-yield problems, potential financing needs, litigation, and the 2017 restatement are material risks.
Most important facts for investors to verify
- Whether PIFA production yields recovered, backorders were resolved, and revenue/customer concentration changed after quarter-end.
- Current cash, marketable securities, cash burn, financing capacity, and progress toward the stated 12-month liquidity runway.
- Completion and effectiveness of internal-control remediation, and the final impact of the 2017 restatements and related proceedings.
- NASDAQ compliance status, shareholder action on the 2013 plan, and any restrictions on equity awards or trading.
- The status and potential financial exposure of the Pulse, securities class-action, and threatened CEPA matters.
- Clarification of an apparent disclosure inconsistency: the accounting note reports no sales-return accrual at March 31, while the MD&A discussion of critical policies reports an $87,510 accrual for that date.