Q quarterly report, Q2 FY2015

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Akers Biosciences, Inc. — Q2 2015 Form 10-Q

Reporting period: Three and six months ended June 30, 2015. Unaudited interim financial statements; amounts below are in U.S. dollars.

Business context

Akers develops and sells rapid, single-use diagnostic tests, including PIFA Heparin/PF4 assays and breathalyzer products. Its strategy centers on expanding distribution, commercializing newer products, pursuing clinical and regulatory work, and conserving cash.

Financial results and liquidity

  • Q2 revenue: $966,922, down 29% from $1,353,156 in Q2 2014. Product revenue was $744,700; related-party license revenue was $222,222.
  • Six-month revenue: $1,476,970, down 42% from $2,527,076. PIFA product sales rose 44% to $898,960; MPC sales fell 75% to $209,805. No REA revenue was recorded, versus $864,000 in the prior-year period.
  • Profitability: Q2 gross profit was $625,897 (about 65% of revenue); operating loss was $2,117,041 and net loss was $2,086,229, or $0.41 per share. For six months, gross profit was $909,603 (about 62% of revenue), operating loss was $3,477,238 and net loss was $3,408,028, or $0.66 per share. The comparable six-month 2014 net loss was $1,106,388.
  • Cash flow: Operations used $2,963,784 in the first half, versus $1,794,784 in 2014. Investing activities provided $2,769,177, largely from marketable-security sales; financing provided no cash. Cash declined by $194,607 to $261,234.
  • Balance sheet at June 30: Cash was $261,234 and marketable securities were $6,416,126. Working capital was $8,718,802; total assets were $13,284,292, liabilities $1,164,979, and stockholders’ equity $12,119,313. The balance sheet reports no interest-bearing debt.
  • Other items: Trade receivables were $1,901,919, net of an $864,000 allowance for doubtful accounts. Related-party notes receivable totaled $1,344,200. The company issued 190,000 restricted shares to directors and officers; period-end shares outstanding were 5,144,837.

Material changes and unusual items

  • Revenue comparisons were affected by prior-year initial stocking orders: $864,000 of REA sales to 36 Strategies in Q2 2014 and a prior-year ChubeWorkx breathalyzer order. Management also cited the indefinite postponement of a French breathalyzer requirement as a factor in lower first-half MPC sales.
  • PIFA sales increased 67% in Q2 and 44% in the first half. An initial EU distributor order for 2 million BreathScan devices began shipping in June; further shipments are expected to be released at the distributor’s direction over the following 12 months.
  • The company recorded an $864,000 bad-debt allowance on the overdue, unsecured 36 Strategies related-party receivable. A board member at the time of the sale had beneficial ownership in 36S; he did not stand for re-election and left the board on August 3, 2015.
  • Akers and ChubeWorkx terminated their exclusive breathalyzer license and supply agreement on May 7, 2015. Akers recognized the remaining $166,667 of deferred license revenue and said it could again solicit international business under the agreement’s former restrictions.
  • From May 1, the company increased prices for certain PIFA products and accrued $291,869 in distributor rebates for existing customers through December 31, 2015. Cost of sales as a percentage of product revenue rose to 46% in Q2 and 49% for the first half; management said margins were settling toward expected ongoing levels.

Outlook, risks and contingencies

  • Management expects near-term operating losses, potentially significant, due to commercialization, marketing, product development, clinical trials and regulatory expenses. It estimated current working capital would cover cash needs for at least 33 months, while noting close monitoring of cash and expenses.
  • Management forecast approximately $250,000 of 2015 capital expenditures, mainly for production, laboratory and facility improvements. No revenue or earnings guidance was provided.
  • Key execution risks include obtaining FDA clearance or EU CE marking where required, achieving product performance and sufficient sales, and establishing repeat ordering with newer distributors. Three customers generated 79% of first-half revenue and owed $839,674 at June 30; management warned that loss of these relationships could have a severe near-term impact. Two suppliers represented 47% of first-half purchases.
  • A $1 million receivable was scheduled in two $500,000 installments. The first, due April 30, was received August 11; the remaining payment was expected by September 30, 2015.
  • Two contract disputes were in discovery: a royalty/purchase-agreement dispute with Lawrence Martin, for which no loss accrual was recorded because a reasonable estimate could not be made; and Akers’ breach-of-contract claim against ChubeWorkx over interest payments under a promissory note. A consent decree concerning escrow of certain ChubeWorkx-held shares was being finalized.
  • Akers invested $64,091 for a 19.9% interest in a China joint venture, accounted for under the cost method. Management reported effective disclosure controls and no material changes in internal control during the quarter.

Most important facts for investors to verify

  • Collection status of the overdue 36S receivable and the remaining scheduled $500,000 receivable payment.
  • Cash burn, available marketable securities, and whether the stated 33-month liquidity estimate remains supportable.
  • Repeat orders and shipment timing for the EU distributor’s 2 million-device order, alongside continued PIFA sales growth.
  • Progress and financial exposure in the ChubeWorkx and Martin disputes, and the status of the ChubeWorkx note and share escrow.
  • Regulatory milestones, commercialization costs, rebate accruals, and whether margins and customer concentration change materially.