Akers Biosciences, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Akers develops and sells rapid diagnostic tests, including PIFA assays and breathalyzer-based products. Figures are in U.S. dollars.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $675,831 | $613,198 | $2,540,942 | $2,307,708 |
| Gross margin | 52% | 61% | 67% | 69% |
| Operating income (loss) | $(1,177,576) | $301,262 | $(3,209,039) | $(2,230,499) |
| Net income (loss) | $(1,177,644) | $310,155 | $(3,193,571) | $(2,207,707) |
| Basic and diluted EPS | $(0.13) | $0.06 | $(0.39) | $(0.41) |
- Q3 revenue rose 10%; product revenue increased 4%, while $37,500 of license and service revenue was recognized. Nine-month revenue rose 10%, including $500,000 of component sales to distributor NovoTek.
- Q3 gross margin fell to 52%, chiefly reflecting initial Tri-Cholesterol production costs, including production setup, waste, training and higher direct labor. Nine-month margin was 67%, down from 69%.
- At September 30, cash was $135,133 and marketable securities were $10,178; together these totaled approximately $145,000. Working capital was reported as $2,401,500. Total assets were $5,528,333, liabilities $1,581,792, and stockholders’ equity $3,946,541. The filing reports no debt balance.
- Operating cash outflow for the first nine months was $3,654,858, versus $3,533,649 in 2016. Investing activities provided $2,780 and financing activities provided $3,714,511, primarily from stock offerings and warrant exercises. Cash at period-end was $135,133.
Material changes and notable items
- The 2016 Q3 operating profit included a $1,299,609 reversal of a related-party bad-debt allowance. This makes the year-over-year operating result comparison unusually favorable to 2016.
- PIFA revenue declined 5% in Q3 and 27% for the nine months, while MPC revenue increased 22% and 96%, respectively. The company attributed weaker PIFA sales partly to distributor inventory management and delayed Chinese reimbursement approvals.
- Tri-Cholesterol shipments began in September after raw-material delays. The initial order was $27,500; management reported three additional orders totaling $110,000. The PIFA Chlamydia launch was delayed into 2018 pending additional FDA-requested clinical data and 510(k) approval.
- Common shares issued and outstanding increased to 8,901,245 at September 30 from 5,452,545 at year-end, following public and private offerings and warrant exercises. The company reported 1,490,570 outstanding warrants at quarter-end.
Outlook, risks and contingencies
- Management said the company would miss its 2017 revenue targets. It nevertheless expected to reach cash-flow positivity within the next 12 months, based on revised revenue targets and its 2018 go-to-market plan; this is an expectation, not a reported result.
- The filing states that substantial doubt exists about the company’s ability to continue as a going concern within one year after issuance. Management cited its working-capital position, a prospective OxiChek customer agreement requiring product design changes, and pending FDA clearance for PIFA Chlamydia. It was pursuing financing and expense controls.
- After quarter-end, warrant exercises raised $680,748 net through the filing date. As of November 10, cash and marketable securities were approximately $432,000 and working capital approximately $2.6 million. The filing also describes additional warrant-exercise terms that could affect dilution.
- Customer concentration is significant: two customers generated 65% of Q3 revenue; three generated 67% for the first nine months. Receivables included extended 180-day payment terms. Management also identified unpredictability in China sales and reliance on distributors.
- Pulse Health’s lawsuit seeks at least $500,000 and an injunction affecting OxiChek. Some claims were dismissed with prejudice, but the remaining case was proceeding; the company recorded no loss accrual because it could not assess the outcome.
- A settlement requires a 5% royalty on relevant gross revenue to ChubeWorkx, subject to a $5 million aggregate cap. Certain company assets are pledged as security under the settlement terms.
Investor verification points
- Confirm the company’s current cash runway, financing availability and progress toward its stated cash-flow-positive objective, given the going-concern warning and low quarter-end cash.
- Track actual Tri-Cholesterol orders and production economics, OxiChek customer negotiations, and FDA timing for PIFA Chlamydia.
- Assess the collectability and timing of customer receivables, especially extended-term and related-party balances, and monitor customer concentration.
- Review subsequent warrant exercises, new warrant terms and share-count changes for their effect on dilution.
- Monitor the Pulse litigation and the financial and asset-pledge obligations under the ChubeWorkx settlement.