Akers Biosciences, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2016; filed November 14, 2016. Akers develops and sells rapid diagnostic tests, including PIFA assays and breath-based products. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $613,198 | $169,473 | $2,307,708 | $1,646,443 |
| Gross profit / (loss) | $376,498 | $(8,479) | $1,594,132 | $901,124 |
| Operating income / (loss) | $301,262 | $(2,345,412) | $(2,230,499) | $(5,822,649) |
| Net income / (loss) | $310,155 | $(2,326,893) | $(2,207,707) | $(5,734,921) |
| Basic and diluted EPS | $0.06 | $(0.45) | $(0.41) | $(1.12) |
| Net cash used in operations | Not provided for quarter | Not provided for quarter | $(3,533,649) | $(4,000,447) |
- Gross margin was 61% in Q3 versus negative 5% a year earlier, and 69% for the nine-month period versus 54%. Management attributed the improvement mainly to higher PIFA selling prices, product mix and cost controls.
- At September 30, cash was $195,860 and marketable securities were $599,942. Current assets were $3.85 million, current liabilities $1.31 million, and working capital $2.54 million. Total liabilities were $1.31 million; the balance sheet reports no debt.
- Cash declined from $402,059 at year-end 2015. Operating activities used $3.53 million; investing activities provided $3.33 million, primarily from selling marketable securities. Capital spending was $88,023.
- Inventories were $1.94 million, up from $1.13 million at year-end, including $756,458 of finished goods. Trade receivables, net, were $738,160.
Material changes and unusual items
- Q3 revenue rose 262%; nine-month revenue rose 40%. Product revenue increased 74% over nine months, led by PIFA sales, while license revenue fell to zero from $320,556 after the ChubeWorkx licensing arrangement ended.
- Q3 and nine-month earnings include a $1,299,609 reversal of a doubtful-note allowance following the ChubeWorkx settlement. Without this unusual benefit, reported operating results would have been materially weaker.
- The settlement provides for recovery of $750,000 in BreathScan alcohol-detector inventory for resale and $549,609 in cash. It also restored Akers’ worldwide breath-technology sales rights, subject to a 5% royalty on gross revenue until ChubeWorkx receives $5 million. Akers recorded $117,949 of royalty expense in the quarter and nine-month period.
- Akers received a $2.5 million Novotek order in February 2016. It recognized approximately $493,850 of PIFA revenue against the order during the first nine months; the remaining $2 million was expected to ship over the rest of the fiscal year, with revenue recognized only when applicable criteria are met.
Outlook, risks and contingencies
- Management expects near-term operating losses as it funds product development, clinical trials, regulatory work and commercialization. It believes working capital will cover estimated cash needs for at least 12 months and expects 2016 capital expenditures of approximately $125,000.
- Key execution risks include obtaining required FDA clearances or European certifications, developing products that meet market needs, achieving sufficient sales, and managing cash needs. Management notes that inability to commercialize could affect the value of patents and other assets.
- Customer concentration is significant: three customers generated 80% of nine-month product revenue, and two generated 74% of Q3 product revenue. One supplier accounted for 61% of purchases for the nine-month period.
- Pulse Health filed suit alleging breach of contract, false advertising and unlawful trade practices relating to OxiChek. Akers disputes the claims; the matter was at an early stage, and the company recorded no loss accrual because a reasonable estimate could not be made.
- After quarter-end, Akers filed a shelf registration allowing offers of up to $7 million of securities, which could result in dilution if equity is issued. The ChubeWorkx settlement also pledges specified company assets to secure royalty obligations, subject to stated exceptions and conditions.
- Management reported disclosure controls were effective and no material changes to internal control over financial reporting during the quarter. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the remaining Novotek order ships, is collected, and converts to recognized revenue on the expected timetable.
- How much of the ChubeWorkx inventory and cash recovery is realized, and the ongoing effect of the 5% royalty and pledged-asset terms.
- Cash runway and financing requirements, given operating cash use, limited cash and marketable securities, and management’s 12-month liquidity assessment.
- Customer and supplier concentration, receivable collectability, and the resale value and sell-through of the increased finished-goods inventory.
- Developments in the Pulse litigation and any potential financial or operational consequences.